The Professional CPA Review School

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 (02) 735 8901 / 735 9031 / 0922 861 0191
email add: crc_ace@yahoo.com
Baguio Davao
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 (074) 442-1440 / 0922-8499196  (082) 285-8805 / 0925-7272223

AUDITING MAY
2019 BATCH
FIRST PRE-BOARD EXAMINATION FEB 10,
2019; 7:30 – 10:30 AM

INSTRUCTIONS: Select the correct answer for each of the following questions.
Mark only one answer for each item by Shading the corresponding letter of your
choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use
Pencil No. 2 only.

1. Which of the following reports may be issued only by an accountant who is

independent of a client?
A. Standard report on an examination of a financial forecast.
B. Report on consulting services.
C. Compilation report on historical financial statements.
D. Compilation report on a financial projection.

2. Which of the following is not true about PSAs as of December 31, 2018?
A. PSAs do not require an audit of internal control.
B. PSAs do not allow reference to division of responsibilities in the audit
report.
C. PSAs require obtaining an attorney’s letter.
D. PSAs are based on a risk assessment approach.

3. Which of the following statement is incorrect?

A. Assurance level refers to the level of the auditor’s satisfaction as to the
reliability of an assertion being made by one party for use by another
party.
B. Review engagements provide a moderate level of assurance.
C. Compilation engagements require the use of auditing expertise rather
than accounting expertise.
D. Agreed-upon procedures engagement does not provide any assurance, nor
does it require independence on the part of the auditor (but where the
auditor is not independent, it must be indicated in the report).

4. Prior to commencing the compilation of financial statements of a nonpublic

entity, the accountant should
A. Perform analytical review procedures sufficient to determine whether
fluctuations among account balances appear reasonable.
B. Complete the preliminary phase of the study and evaluation of the entity's
internal accounting control.
C. Verify that the financial information supplied by the entity agrees with the
books of original entry.
D. Acquire knowledge of any specialized accounting principles and practices
used in the entity's industry.

5. A study and evaluation of internal control made in connection with an annual

audit is usually not sufficient to express an opinion on an entity's internal
control because
A. Weaknesses in the system may go unnoticed during the audit engagement.
B. A study and evaluation of internal control is not necessarily made during
an audit engagement.
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C. Only those controls of interest to the auditor are reviewed, tested, and
evaluated.
D. Internal controls can change each year.

6. Which of the following is true to an agreed-upon procedures engagement?

A. an auditor carries out procedures of an audit nature to which the auditor
and any appropriate parties have agreed
B. the auditor reports on the factual findings together with conclusions
arrived at
C. report is restricted to those parties that have agreed to the procedures and
unlimited others who may see a derived benefit from the auditor's report
D. the auditor lends value to the financial elements reported upon through a
reduction of detailed data to an understandable form without testing the
related underlying assertions

7. After an auditor had been engaged to perform the first audit for a nonpublic
entity, the client requested to change the engagement to a review. In which of
the following situations would there be a reasonable basis to comply with the
client's request?
A. The client's bank required an audit before committing to a loan, but the
client subsequently acquired alternative financing.
B. The auditor was prohibited by the client from corresponding with the
client's legal counsel.
C. Management refused to sign the client representation letter.
D. The auditing procedures were substantially complete and the auditor
determined that an unqualified opinion was warranted, but there was a
disagreement concerning the audit fee.

8. All of these may be found in a review program except:

A. Obtaining an understanding of the entity’s relevant internal accounting
control
B. Inquiries concerning the entity’s procedures for recording, classifying and
summarizing transactions, accumulating information for disclosure in the
financial statements and preparing financial statements
C. Analytical procedures designed to identify relationships and individual
items that appear unusual
D. Reading the financial statements to consider, on the basis of information
coming to the auditor’s attention, whether the financial statements appear
to conform with the basis of accounting indicated

9. The reporting standards for an engagement to audit accounts payable is found

in…
A. PSA 700 C. PSA 805
B. PSA 800 D. PSA 2400

10. Which of the following is not always required to be performed by the auditor?
A. understand the client’s internal control and document such understanding
B. test of details and balances
C. analytical review in the planning phase of an audit
D. documentation of the basis of control risk.

11. The following relationships are all true except…

A. the more substantive tests performed, the lower the detection risks
becomes

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B. the less reliable the internal controls, the more reliance the auditor needs
from substantive tests
C. the higher the control risk, the more likely detection risk will increase
D. the higher the detection risk, lesser is the reliance placed on substantive
tests

12. Audit risk means the risk that the auditor gives _______________ when the
financial statements are materially misstated.
A. disclaimer C. unqualified audit opinion
B. an adverse opinion D. no opinion

13. A firm's sales procedure involves preparing sales invoices based on shipping
documents; posting the sales amounts to accounts receivable records; and
posting quantities billed to the inventory records. Due to control weaknesses
in the procedure, certain goods that are shipped may not be reflected in the
sales invoices. The exposure from this risk can result in:
A. overstatements of revenues, receivables, and inventory.
B. understatements of revenues and receivables and over statement of
inventory.
C. understatements of revenues, receivables, and inventory.
D. overstatements of revenues and receivables and understatement of
inventory.
E. understatement of revenues and overstatements of receivables and
inventory.

14. Which of the following quality control objective would be least important to
the auditor?
A. Human Resources C. Determination of audit fee
B. Leadership Responsibilities D. Assignment of personnel

15. Independence in auditing means

A. Not having any financial or economic relationship
B. Being an advocate for the client
C. Taking an unbiased viewpoint
D. Not having a loan to or from an assurance client
16. Which of the following is true regarding ethical compliance on cross-border
activities?
A. If the ethical requirement in the home country is mandatory, we follow such
rules.
B. If the ethical requirement is less strict than our code, we have the option to
apply our code.
C. If the ethical requirement in our code is less strict than the ethical
requirements of the home country, the accountant must harmonize the
provisions.
D. If there is a difference in ethical requirement, being a member of both or
one profession is not a factor for ethical responsibility.

17. Which of the following is false regarding the functions of the Board of
Accountancy (BOA)?
A. The BOA has the power to issue, suspend, revoke, or reinstate the
Certificate of Registration for the practice of the accountancy profession.
B. The BOA is empowered by law to suspend a CPA without hearing if there is
prima facie proof of malicious involvement on his part.
C. The BOA is tasked by law to prescribe and/or adopt a Code of Ethics for
the practice of accountancy.

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D. The BOA is empowered to monitor the conditions affecting the practice of
accountancy and adopt such measures as it may deem proper.

18. An entity under common control, ownership or management with the firm or
any entity that a reasonable and informed third party having knowledge of all
relevant information would reasonably conclude as being part of the firm
nationally or internationally.
A. Assurance Team C. Network Firm
B. Firm D. Engagement Team

19. A candidate for CPA examination to obtain a “passing mark” must:

A. Must have a general average of 75% in majority of the subjects
B. Must have a general average of at least 75%, with no grade below 65%
C. With NO grade below 65% in any given subject
D. Must have a general average of at least 65%

20. Any person who shall violate any of the provisions of Republic Act No. 9298 or
any of its implementing rules and regulations as promulgated by the Board
subject to the approval of the Commission, shall, upon conviction, be punished
by a:
A. Fine of not less than P5,000 or by imprisonment not exceeding one year or
both
B. Fine of not more than P50,000 or by imprisonment not less than two years,
or both
C. Fine of not less than P50,000 or by imprisonment not exceeding two years.
or both
D. Fine of not more than P100,000 or by imprisonment not exceeding two
years or both

21. The policy of the State, in producing world-class accountants, is to provide:

A. A forum that will create opportunities to all Filipino accountants.
B. An irreproachable licensure examinations and programs that nurture
professional growth.
C. Programs that will ensure international exposures.
D. Avenues of learning opportunities and structured settings that rewards
achievement.

22. Which of the following statements is (are) true?

Statement No. 1: Philippine Standards on Auditing (PSAs) are to be applied in
the audit of historical financial information.
Statement No. 2: Philippine Standards on Assurance Engagements (PSAEs)
are to be applied in assurance engagements dealing with subject matters other
than historical financial information.
Statement No. 3: Philippine Standards on Related Services (PSRSs) are to be
applied to compilation engagements, engagements to apply agreed upon
procedures to information and other review engagements as specified by the
AASC.
A. only one statement is true C. all statements are false
B. two statements are true D. all statements are true

23. Audit evidence can come in different forms with different degrees of
persuasiveness. Which of the following is the least persuasive type of
evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and vendors.

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C. Sales invoices inspected by the auditor.
D. Computations made by the auditor.

24. The negative request form of accounts receivable confirmation is useful particularly when the
a. b. c. d.
Assessed level of control risk
relating to receivable is… Low Low High High
Number of small balances is Many Few Few Man
y
Consideration by the Likely Unlike Likel Like
recipient is ly y ly

25. For audits of financial statements made in accordance with GAAS, the use of analytical procedures
is required to some extent
a. b. c. d.
As a substantive Yes Yes No No
test
In the final review Yes No Yes No
stage

26. As a result of tests of controls, an auditor under-assessed control risk and

decreased substantive testing. This underassessment occurred because the
true occurrence rate in the population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.

27. "There are no violations or possible violations of laws or regulations whose

effects should be considered for disclosure in the financial statements or as a
basis for recording a loss contingency."
The foregoing passage most likely is from a (an)
A. Client engagement letter.
B. Report on compliance with laws and regulations.
C. Management representation letter.
D. Attestation report on an internal control structure.

28. A client whose accounting period ends on December 31 might have to adjust
its financial statements because of subsequent events that occurred after the
balance sheet date. Which of the following subsequent events would require
financial statement adjustment?
A. Admission that a substantial portion of the ending inventory is obsolete.
B. Collection of 90% of the accounts receivable.
C. Changes in the board of directors.
D. Adoption of the accelerating depreciation method.

29. The adverse effects of events causing an auditor to believe there is substantial
doubt about an entity’s ability to continue as a going concern would most
likely be mitigated by evidence relating to the
A. Ability to expand operations into new product lines in the future.
B. Feasibility of plans to purchase leased equipment at less than market rate.
C. Marketability of assets that management plans to sell.
D. Committed arrangements to convert preferred stock to long-term debt

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30. Which of the following would not warrant an inclusion of an emphasis of a
matter paragraph in the auditor’s report?
A. Changes in reporting entities, such as the inclusion of an additional
company in combined financial statements.
B. The existence of significant related party transactions
C. Important events occurring subsequent to the balance sheet date.
D. Material uncertainties disclosed in the footnotes.

31. An auditor most likely would issue a disclaimer of opinion because of

A. Inadequate disclosure of material information.
B. The omission of the statement of cash flows.
C. A material departure from generally accepted accounting principles.
D. Management's refusal to furnish written representations.
32. When the financial statements of the prior period were audited by another
auditor, the incoming auditor's report should indicate:
1. The date of prior years' financial statements issuance
2. That the financial statements of the prior period were audited by another
auditor.
3. The type of report issued by another auditor and if modified, the reason,
therefore.
A. Yes, Yes, Yes C. No, Yes, Yes
B. Yes, Yes, No D. No, No, Yes

33. An additional paragraph following the basis of opinion section of an auditor's

report describes an uncertainty as follows: As discussed in Note X to the
financial statements, the Company is a defendant in a lawsuit alleging
infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot
presently be determined. Accordingly, no provision for any liability that may
result upon adjudication has been made in the accompanying financial state-
ments.
What type of opinion should the auditor express under these circumstances?
A. Unqualified C. "Except for" qualified
B. Adverse D. Disclaimer

34. In which of the following circumstances would an auditor most likely add an
emphasis of matter paragraph to the standard report?
A. The auditor is asked to report on the balance sheet, but not on the other
basic financial statements.
B. There is substantial doubt about the entity's ability to continue as a going
concern.
C. Management's estimates of the effects of future events are unreasonable.
D. Certain transactions cannot be tested because of management's records
retention policy.

35. During 2017, the research staff of Environmental Safety Corp., a US SEC
registered entity, devoted its entire efforts towards developing a new coliform-
control device. All costs which could be attributed directly to the pollution-
control device project were accounted for as deferred charges and classified
on the balance sheet at December 31, 2017, as a current asset. In the course
of its audit of the corporation’s 2017 financial statements, Gina, CPA, found
persuasive evidence that the research conducted to date would not result in a
marketable product. Assuming that the deferred research charges are
significantly material in relationship to both income and total assets, Gina
should

SET A
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A. Issue a “subject to” qualified opinion.
B. Disclaim an opinion.
C. Issue an adverse opinion.
D. Give an unqualified opinion provided that the uncertainty of ultimate
realization of the deferred charges is disclosed in the footnotes.

PROBLEM 1
The records of the ZEST AIR Company have not been examined for the three-year
period ended December 31, 2021. As a result of your audit of the records for the
year ended December 31, 2021 and your review of the records of the two prior
years, it is necessary to revise the net income and the retained earnings based
upon the audited data which follow:
The company’s retained earnings at December 31, 2021 follows:
Net income, 2019 P 90,000
Net income, 2020 100,000
Net income, 2021 110,000
Balance, December 31, 2021 P 450,000
No dividends were declared or paid during the three-year period. The company’s
policy is to estimate bad debts based as a percentage of revenue.
From your examination, you obtained the following information which must be
taken into consideration at the close of the year involved:
December 31, 2019:
1. Goods consigned out to consignees are included in the inventory at
P120,000, which is 20 percent in excess of cost.
2. The following liabilities are omitted from the records:
New construction P25,000
Unearned revenue 3,000
Accrued salaries 4,100

December 2020:
3. Goods held on consignment are included in the inventory at P180,000.
4. Accrued taxes of P2,100 were omitted from the records.
5. Land costs of P90,000 have been erroneously charged to expense.
6. The inventory is overstated by P14,300, because of an error in footing an
inventory price sheet.
7. Depreciation was omitted; P5,000 should be provided.
December 31, 2021:
8. Uncollectible accounts receivable of P11,000 are to be written off.
9. The following liabilities are omitted from the records:
For purchases of new machinery P12,000
Accrued utilities 5,900
36. What is the adjusted net income in 2019?
a. P37,900 b. P68,900 c. P43,900 d. P62,900
37. What is the adjusted net income in 2020?
a. P54,900 b. P23,900 c. P15,700 d. P34,900
38. What is the adjusted net income in 2021?
a. P 289,500 b. P 288,500 c. P 300,500 d. P 277,500
39. What is the adjusted retained earnings at the end of 2021?
a. P393,300 b. P 531,300 c. P 532,300 d. P 529,100
40. What is the adjusted retained earnings at the end of 2019?
a. P 187,900 b. P 212,900 c. P 193,900 d. P 218,900
Problem 2
BAYAN Corporation purchased P100,000 8% bonds for P92,418 on January 1, 2017.
BAYAN’s business model is a combination of collecting contractual cash flow and
selling the financial instruments. The bonds were purchased to yield 10% interest.

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Page 8 of 13
Interest is payable annually every January 1. The bonds mature on January 1,
2022. On January 1, 2019, BAYAN change its business model to purely collecting
contractual cash flows.
The prevailing interest rates of the bonds are as follows:
December 31, 2016 10%
December 31, 2017 11%
December 31, 2018 12%
December 31, 2019 11.5%
Questions:
41. Interest income for year 2018
a. 8,000 b. 9,366 c. 9,242 d. 9,818
42. Carrying amount of the investment as of December 31, 2018.
a. 95,026 b. 90,393 c. 93,240 d. 90,973
43. Unrealized gain or loss on investment on December 31, 2018.
a. (1,786) b. (4,053) c. 4,053 d. (4,633)
44. Unrealized gain on loss as of December 31, 2019.
a. (3,289) b. (2,709) c. 3,289 d. (2,519)
45. Carrying value of investment as of December 31, 2019.
a. 97,240 b. 96,429 c. 93,240 d. 110,000
PROBLEM 3
The following information pertains to PETRON CORPORATION:
PETRON CORPORATION
BANK RECONCILIATION
NOVEMBER 30, 2019
Balance per bank statement 371,500
Less: Outstanding checks
No. 7645 9,000
7648 12,000
7654 8,800
7661 _3,225
Add: Deposit in transit 20,600
1,400 33,0
25
Bank service charge 338,475
Balance per books 22,0
00
360,4
75
CHECK REGISTER
Decem Voucher
ber 31, Payee No. s Discoun Cash
2019 Power-V 7662 Payable t 19,000
Date Corp. 7663 20,000 1,000 2,400
Dec. 1 Star Fuel 7664 2,400 1,875
3 Trading 7665 1,875 9,000
7 Ariel 7666 9,000 73,000
12 Enterprises 7667 73,000 7,840
15 Flying-J Corp. 7668 8,000 160 13,426
16 Payroll 7669 13,700 274 6,000
18 Shell Co. 7670 6,000 7,000
21 Tide Corp. 7671 7,000 84,034
22 Phoenix , Inc. 84,034 223,575
28 Petty cash 224,975
fund
Payroll

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Banco De Oro
Period: November 30, 2019 – December 31, 2019
Check.
Date Description No. Debit Credit
371,50
Balance last statement 0
Dec. 20,60
1 Cash deposit 0
1 Check issued 7648 12,000
4 Check issued 7662 19,000
4 Check issued 7661 3,225
62,00
5 Check deposit 0
6 Check issued 7663 2,400
23,00
8 Check deposit 0
10 Check issued 7664 1,875
15 Encashment 7666 73,000
22 Encashment 7670 7,000
28 Encashment 7671 84,034
Debit memo - service
29 charge 1,000
1,55
29 Credit memo - interest 0
A physical count of cash conducted on December 31, 2019 showed a balance of
P52,000.
46. What is the adjusted cash balance as of November 30, 2019?
a. P359,075 b. P371,500 c. P360,475 d. P374,600
47. What is the unadjusted book balance of December 31, 2019?
a. P 273,900 b. P 200,500 c. P 221,900 d. P272,500
48. What is the correct amount of checks outstanding as of December 31, 2019?
a. P 54,500 b. P36,700 c. P36,266 d. P54,066
49. What is the correct cash balance as of December 31, 2019?
a. P272,616 b. P273,050 c. P274,450 d. P275,116

PROBLEM 4
JG Summit Company operates a wholesale oil products company. JG Summit
believes that an employee and a customer are conspiring to steal gasoline. The
employee records sales to this customer for less than the amount actually placed in
the customer’s tank truck. In order to confirm or refuse these suspicions, JG
Summit has collected the following data for the past 10 working days.
Quantity Cost per
Item (gallons) unit (gal.) Total Cost
Inventory, September 1 220,000 P 1.45 P
319,000
Purchases 1,560,0 1.45 2,262,00
00 0
Goods available for sale 1,780,0 P2,581,0
00 00
JG Summit had sales of P2,512,000 during this 10-day period. All sales were made
at P1.60 per gallon. A physical inventory indicates that there are 192,000 gallons
of gasoline in inventory at the close of business on September 10.
50. How much inventory should be present at the end of the 10-day period (in
gallons)?
a. 210,000 b. 200,000 c. 192,000 d. 220,000

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51. What is the cost of missing inventory?
a. P304,500 b. Zero c. P26,100 d. P40,600
PROBLEM 5
ARMSCOR a retailer, maintained inadequate records. Only purchases of
merchandise and acquisition of office equipment are paid by checks. All other
expenditures are paid out of cash receipts.
Total deposits per bank statement amounted to P1,305,000 in 2019. This amount
includes ARMSCOR’s initial investment of P200,000 and December proceeds of
bank loan in the amount of P50,000.
The following expenditures were made in 2019:
1. Payment of one year rental for 2019 amounting to P50,000.
2. Improvements made to the leased building amounting to P100,000. These
improvements were completed on January 10 and were estimated to last for
5 years.
3. Payment for salaries, utilities, insurance, and other expenses amounted to
P54,500.
4. Personal expenses of the owner 2,400.
Inspection of the bank statement for the month of December 2019 showed an
ending balance of P53,000. Checks amounting to P21,500 in payment of trade
payables did not clear the bank until January. Cash on hand as of December 31 of
P3,300 was deposited in the bank on January 2020.

An inventory of merchandise taken on December 31, 2019 showed P167,100 of

merchandise on a cost basis. Unpaid suppliers invoice for merchandise purchases
amounted to P182,000. Cancelled checks returned by the bank showed that a total
of P1,100,000 were paid to suppliers during the year.

Customers acknowledge indebtedness of P12,700 at the end of 2019. Of this

amount, P1,200 is probably not collectible.

An office equipment with a cash price of P70,000 was purchased early in January
on a one-year installment basis. During the year, check for the down payment and
all maturing installments totaled P56,000. At December 31, the final installment of
P15,250 remains unpaid. The fixtures have an estimated useful life of ten years.
52. What is the total sales in 2019?
a. P1,277,900 b. P 1,271,000 c. P 1,274,600 d. P 1,067,700
53. What is the cost of goods sold in 2019?
a. P 1,232,400 b. P 1,1114,900 c. P 1,210,900 d. P 1,136,400
54. What is the correct net income/(loss) in 2019?
a. P 7,550 b. P (295,350) c. P 8,800 d. P 5,150
55. What is the cash shortage as of December 31, 2019?
a. P 0 b. P 71,200 c. P 74,500 d. P 96,000
56. What is the correct cash balance as of December 31?
a. P 34,800 b. P 127,500 c. P 130,800 d. P 31,500

PROBLEM 6
In connection with the audit of PHINMA Corporation’s financial statements for the
year ended December 31, 2018, you were assigned to perform cut-off test to
determine whether transactions were appropriately recorded in the correct
accounting period. Below is the summary of your audit findings:
1. Merchandise inventory as stated in the trial balance represented the result of
the count conducted on December 30, 2018 on inventories on hand. All sales
were made at 40% gross profit on sales. The following information were
found to be relevant in your audit of inventories:

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A shipment of goods invoiced at P225,000 to a customer on December 29,
terms FOB destination was recorded in 2019. The goods were received by
the customer on January 4, 2019.
 The invoice for goods costing P175,000 was received and recorded as
purchase on December 31, 2018. The related goods, shipped FOB
Destination were received on January 4, 2019.
 Goods valued at P612,800 are on consignment from a vendor. These
goods were included from the physical count.
 Goods costing P275,000 are on consignment with a customer and were
not included in the physical count.
 Goods costing P217,500 were received from a vendor on January 4, 2019.
The related invoice was received and recorded on January 6, 2019. These
goods were shipped by the vendor on December 31, 2018 under an FOB
shipping point terms.
 Goods invoiced at P1,062,500 were shipped on December 31, 2018, and
were received by the customer on January 2, 2019. The terms of the
invoice were FOB shipping point. The sales has been appropriately
recorded in 2018.
2. Collections for January 2019 of P654,600 were recorded in the December
2018 cash records. The receipts of P360,100 represents cash sales with the
balance representing collections from customers who paid within the 5%
cash discount period.
3. Accounts payable of P372,400 was paid in January 2019. The payments on
which a P12,400 cash discount has been taken were included in the
December 31, 2018 check register.
4. The following accounts were extracted from the unadjusted trial balance of
PHINMA Corp. as of December 31, 2018:
Cash 963,200
Accounts receivables 2,254,000
Merchandise inventory 6,662,800
Accounts payable 4,201,000
Accrued expenses 17,900
Requirements: Compute the adjusted balances of the following accounts:
57. Cash
a. P963,200 b. P693,400 c. P681,000 d. P 668,600
58. Accounts receivable
a. P2,254,000 b. P2,548,500 c. P 2,564,000 d. P2,908,600
59. Inventory
a. P5,010,000 b. P5,860,000 c. P 6,040,000 d. P6,080,000
60. Net adjustment to cost of sales:
a. Debit by P57,500 c. credit by P580,000
b. Credit by P232,500 d. debit by P 665,300
61. An auditor should trace shipping documents to sales invoice to provide
assurance that
a. Payments are properly applied to customer accounts.
b. All shipments are billed to customers.
c. Unit prices billed are in accordance with sales contracts.
d. All sales are supported by shipping documents.

PROBLEM 7
Your audit of Double Dragon Restaurant which was established on July 1, 2018,
disclosed that the owner started with an investment totalling P5 million, composed
of P3 million in cash from his personal funds and P2 million worth of equipment.
On September 1, Double Dragon Restaurant borrowed P5 million from Import
Bank. The loan is due in 5 equal monthly instalment beginning October 1. Interest

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Page 12 of 13
of P100,000 applicable to this loan was deducted in advance from principal
amount.

During the year, Double Dragon’s collected P19 million from its customers. Amount
still due from corporate customers amounted to P2 million. Purchases for kitchen
supplies amounted to P18.5 million, P2.3 million of which was paid in January
2019. The restaurant operations were made at 50% above cost. The owner
purchased a new equipment on October 1, 2018. Depreciation of P80,000 was
recorded for this equipment during the year.

All operating expenses, including purchase of new equipment, were paid in cash.

Equipment is depreciated using the straight-line method over a five-year life taking
into account a residual value equal to 20% of the cost.

DOUBLE DRAGON Restaurant business operations ending December 31, 2018

showed a net income of P1.2 million.

Compute for the following:

62. Acquisition cost of the new equipment
a. P1,000,000 b. P 2,000,000 c. P1,600,000 d. P800,000
63. Payment of operating expenses during 2018
a. P5,220,000 b. P5,420,000 c. P5,540,000 d. P 5,460,000
64. Cash balance as of December 31, 2018
a. P 240,000 b. P880,000 c. P1,440,000 d. P1,240,000
65. Inventory as of December 31, 2018
a. P9,250,000 b. P8,100,000 c. P2,200,000 d. P 4,500,000
66. Total assets as of December 31, 2018
a. P11,500,00 b. P11,700,000 c. P 10,500,000 d. P10,900,000
0

PROBLEM 8
During your audit of the records of the SOLAR Corporation for the year ended
December 31, 2019, the following facts were disclosed:
Raw materials inventory, 1/1/2019 P
720,200
Raw materials purchases 5,232,800
Direct labor 6,300,000
Manufacturing overhead applied (150% of direct 9,450,000
labor)
Finished goods inventory, 1/1/2019 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200
Your examination disclosed the following additional information:
a. Purchases of raw materials
Month Units Unit Price Amount
January – 55,000 P17.76 P 976,800
February
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – 45,000 20.40 918,000
October
November – 60,000 20.80 1,248,00
December 0
265,000 P5,232,800

SET A
CRC-ACE: Auditing First Pre-board – May 2019 Batch
Page 13 of 13
b. Data with respect to quantities are as follows:
Units
Explanation 1/1/19 12/31/19
Raw materials 35,000 ?
Work in process (80% completed) 0 25,000
Finished goods 15,000 40,000
Sales, 205,000 units
c. Raw materials are issued at the beginning of the manufacturing process.
During the year, no returns, spoilage, or wastage occurred. Each unit of
finished goods contains one unit of raw materials.
d. Inventories are stated at cost as follows:
 Raw materials – according to the FIFO method
 Direct labor – at an average rate determined by correlating total direct labor
cost with effective production during the period
 Manufacturing overhead – at an applied rate of 150% of direct labor cost
Based on the above and the result of your audit, answer the following:
67. The raw materials inventory as of December 31, 2019 is
a. P1,976,000 b. P1,352,000 c. P936,000 d. P897,800
68. The work in process inventory as of December 31, 2019 is
a. P1,780,000 b. P1,751,294 c. P1,885,565 d. P1,776,000
69. The finished goods inventory as of December 31, 2019 is
a. P3,352,000 b. P3,334,000 c. P3,553,130 d. P3,284,588
70. The cost of goods sold for the year ended December 31, 2019 is
a. P16,897,00 b. P16,568,304 c. P15,857,000 d. P16,875,000
0

End of Examination

SET A