1.

An auditor believes that there is substantial doubt about an entity ability to continue as a going
concern for a reasonable period of time. In evaluating the entity plans for dealing with the adverse
effects of future conditions and events the auditor most likely would consider as a mitigating factor
the entity plans to
a. Repurchase the entity stock at a price below its book value
b. Issue stock options to key executives
c. Lease rather than purchase operating facilities
d. Accelerate the due date of an existing mortgage
2. You are analyzing the shareholders equity section of the Pearson Corp. The following information
was abstracted from the accounts at Dec. 31, 2007:
i. Total income since incorporation P7,875,000
ii. Total cash dividends paid 2,437,500
iii. Proceeds from sale of donated stock 843,750
iv. Total value of stock dividends distributed 562,500
v. Excess of proceeds over cost of treasury stock sold 131,250

What should be the balance of the Retained earnings account as of Dec. 31, 2007?

a. 4,875,000
b. 6,218,750
c. 7,031,250
d. 10,031,250

3. Hollow Corporation wishes to exchange a machine used in its operations. Hollow has received the
following offers from other companies in the industry.

a. Doro Company offered to exchange a similar machine plus 23,000. (The exchange has
commercial substance for both parties)
b. Winnie Company offered to exchange a similar machine. (The exchange lacks commercial
substance for both parties)
c. Litson Company offered to exchange a similar machine, but wanted 3,000 in addition to Hollows
machine. (The exchange has commercial substance for both parties.)

In addition, Hollow contacted Green Corporation, a dealer in machines. To obtain a new machine, Hollow
must pay 93,000 in addition to trading in its old machine.

Hollow Doro Winnie Litson Green

Machine cost 160,000 120,000 152,000 160,000 130,000

Accumulated 60,000 45,000 71,000 75,000 0

Depreciation

Fair value 92,000 69,000 92,000 95,000 185,000

In situation A, the amount of loss on disposal of machinery to be recognized by each company is

 Hollow Doro
A. 31,000 0
B. 8,000 6,000
C. 31,000 6,000
D. 8,000 0

4. The bank statement for the checking account of MSU, INC. showed a Dec. 31, 2011 balance of
1,463,212. Information that might be useful in preparing a bank reconciliation is as follows:
a. Outstanding checks were 132,025
b. The Dec. 31, 2011 cash receipts of 57,500 were not deposited in the bank until Jan.
2, 2012
c. One check written in payment of rent for 24,600 was correctly recorded by the bank
but was recorded by MSU as 26,400 disbursement
d. In accordance with prior authorization, the bank withdrew 45,000 directly from the
checking account as payment on a mortgage note payable. The interest portion of
that payment was 35,000. Mus HAS MADE NO ENTRY TO RECORD THE AUTOMATIC
PAYMENT.
e. Bank service charges of 1,400 were listed on the bank statement
f. A deposit of 87,500 was recorded by the bank on Dec. 13, but it did not belong to
MSU. The deposit should have been made to the checking account of SUM, Inc.
g. The bank statement included a charge of 8,500 for an NSF check. The check was
returned with the bank statement and the company will seek payment from the
customer
h. MSU maintains a 20,000 petty cash fund that was appropriately reimbursed at the
end of December.
i. According to instruction for MSU on Dec. 30, the bank withdrew 1,000,000 from the
account and purchased Treasury Bills for MSU. MSU recorded the transaction in its
books on Dec. 31 when it received notice from the bank. Half of the treasury bills
mature in two months and the other half in six months.

What is the corrected cash balance on Dec. 31, 2011?

a. 1,304,787
b. 1,301,187
c. 1,284,187
d. 1,211,187

5. A manufacturing company received a substantial sales return in the last month of the year, but the
credit memorandum for the return was not prepared until after the auditors had completed their
field work. The returned merchandise was included in the physical inventory.
a. Aged trial balance of accounts receivable is prepared
b. Credit memoranda are prenumbered and all are numbers are accounted for
c. A reconciliation of the trial balance of customers accounts with the general ledger
control is prepared periodically
 d. Receiving reports are prepared for all materials received and such reports are
accounted for on regular basis
6. Sumpack Corp. began operations in 2006 on July 15, 2011 a fire broke out in the company
warehouse destroying all inventory and may accounting records. The following information was
assembled form the microfilmed records. All sales and purchases are on account

Jan. 1, 2011 July 15, 2011

Inventory 287,700

Accounts receivable 261,180 257,780

Accounts payable 176,280 245,700

Collections from customers, Jan 1, 2011-July 15, 2011 1,507,600

Payment to suppliers, Jan. 1, 2011-July 15, 2011 975,000

Goods out in consignment on July 15, 2011 at cost 97,500

Goods in transit at July 15, 2011, purchased FOB shipping cost

(Included in the July 15, accounts payable balance) 34,750

The following is a summary of prior ears sales and gross profit on sales:

2008 2009 2010

Sales 1,252,000 1,410,000 1,360,000
Gross profit 375,600 366,600 462,400

What is the company average gross profit ratio based on its prior years sales?

a. 26%
b. 34%
c. 30%
d. 29%
7. Which of the following statements about test of controls is most accurate?
a. Auditing procedures cannot concurrency provide both evidence of the effectiveness of
internal control procedures and evidence required for substantive test
b. Test of controls include observations of the proper segregation of duties that
ordinarily may be limited to the normal audit period
c. Test of controls should be based upon proper application of an appropriate sheet date
or during sampling plan
d. Test of controls ordinarily should be performed as of the balance sheet date of during
the period subsequent to that date
8. On July 1, 2007, one of Floyd Inc.s delivery trucks was destroyed in an accident. On that date, the
Trucks book value was 900,000. On July 15, 2007, Floyd Inc. received and recorded a 42,000 invoice
 for a new engine installed in the truck in May 2007 and another 6,000 invoice for various repairs.
What amount should Floyd Inc. use to determine the gain or loss on disposal of the truck?
a. 900,000
b. 942,000
c. 948,000
d. 936,000
9. On Dec. 30, 2007, Swift Co. shipped to a customer merchandise with selling price of 37,500; terms
net 30, FOB shipping point. The sale which is 125% of cost was recorded in Jan. 2007 when the check
was received from customer. Ending inventory was determined by physical count on Dec. 31, 2007.
As a result of the above transactions, Swift Co.s cost of goods sold for the year ended Dec. 31, 2007
was:
a. Understated by 3,000
b. Overstated by 30,000
c. Overstated by 37,500
d. Correctly stated
10. Brand Co. reported 9,000 of net income for 2007. The correct net income however was 11,000. It
was determined that the ending inventory was overstated by 1,000. The only other error was with
the beginning inventory which must have been:
a. Understated by 1,000
b. Understated by 3,000
c. Overstated by 1,000
d. Overstated by 3,000
11. Henry Company had the following bank reconciliation at March 31:
Balance per bank statement, March 31 93,000
Add: Deposit in transit 20,600
113,600
Less: Outstanding checks 25,200
Balance per books, March 31 88,400
Data per bank statement for the month of April follow:
Deposits 116,800
Disbursements 99,400

All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30
totaled 15,000. What is the amount of cash disbursements per books in April?

a. 89,200
b. 99,400
c. 109,600
d. 114.400

12. In connection with your audit of the Brahe Corporations financial statements for the year ended
Dec. 31, 2011, you noted the following items relative to the companys intangible assets
 A patent was purchased form Tycho Company for 6,000,000 on Jan. 2, 2010. Brahe
estimated that the remaining useful life of the patent to be 10 years the patent was
carried in Tychos accounting records at 4,000,000 when Tycho sold it to Brahe
During 2011, a franchise was purchased from Nova company for 1,440,000. In addition,
5% of the revenue form the franchise must be paid to Nova. Revenue from the franchise
for 2011 was 7,500,000. Brahe estimates the useful life of the franchise to be 10 years
and takes full years amortization in the eyar of purchases
Brahe incurred research and development costs 1,299,000 in the industry estimate that
the remaining life of the patent purchased on Jan. 2, 2010 is only 5 years from Jan.1 ,
2011
Based on the above and the result of your audit, determine the following:
What is the amortization of patent for 2011?
a. 1,080,000
b. 1,200,000
c. 600,000
d. 1,350,000
14. An auditor may report on summary financial statements that are derived from complete audited
financial statements is the
a. Auditor indicates whether the information in the summary financial statements is
consistent with the audited financial statements from which is was derived
b. Summary financial statements re-distributed only to management and the board of
directors
c. Auditor describes the additional review procedures performed on the summary financial
statements
d. Summary financial statements are presented in comparative form which the prior years
summarized financial statements
15. Which statements are incorrect regarding external confirmation?
a. External confirmation is the process of obtaining and evaluating audit evidence through
a direct communication form a third party in response to a request for information
about a particular item affecting assertions made by management in the financial
statements
b. External confirmation of an account receivables provides strong evidence regarding the
valuation of the account as at a certain date
c. The auditor should tailor external confirmation request to the specific audit objective
d. The auditor may use positive or negative external confirmation request or a
combination of both
16. An independent auditor has the responsibility to design the audit to provide reasonable assurance
of detecting errors and fraud that might have a material effect on the financial statements. Which of
the following, if material, would be a fraud as defined in PSA 240 (the auditors responsibilities
relating to fraud in an audit of financial statements)
a. Misappropriation of an asset or groups of assets
b. Clerical mistakes in the accounting data underlying the financial statements
c. Mistakes in the application of accounting principles
d. Misinterpretation of facts that existed when the financial statements were prepared
17. A CPA has been engaged to perform review services for a client. Identity which of the following is a
correct statement.
a. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework
b. The financial statements are primarily representations of the CPA
c. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books
d. The CPA is performing an assurance engagement other than an audit of the financial
statements
18. In auditing payroll, an auditor most likely would
a. Observe entity employees during a payroll distribution
b. Compare payroll costs with entity standards and budgets
c. Trace individual employee deduction to entity journal entries
d. Verify that checks representing unclaimed wages are mailed
19. A portion of the Spark Companys balance sheet appears as follows:

December 31, 2011 December 31, 2010

Assets:
Cash 353,300 100,000
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
2011, cash totaling 471,700 was paid on accounts payable. Operating expenses for 2011 totaled
220,000. All sales are cash sales. The inventory was restocked by purchasing 2,500 units per month and
valued by using periodic FIFO. The unit cost of inventory was P32.60 during January 2011 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 2010 was valued at P32.50 per unit.

Based on the preceding information, compute the number of units sold during 2011

a. 7,066
b. 18,400
c. 4,268
d. 13,100
20. PSA 620 (revised and redrafted), using the work of an auditors experts deal with
a. The auditors use of the work of a management expert
b. The auditors responsibilities regarding the use of an individual or organizational work
in a field of expertise other than accounting or auditing, when that work is used to
assist the auditor in obtaining sufficient appropriate audit evidence
c. Situations where the engagement team includes a member with expertise in a
specialized area of accounting or auditing
 d. How the auditors responsibility for the opinion on the entity financial statements will be
divided between the auditor and the auditors expert
21.