AUDITING CUP – 19th RMYC

ANSWER KEY
FINAL ROUND
HOUSE STARK

1. (A) Which paragraphs of an auditor’s report on financial statements should refer to Philippine
Financial Reporting Standards?
A. Introductory and Opinion
B. Auditor’s Responsibility and Management’s Responsibility
C. Introductory and Auditor’s Responsibility
D. Management’s Responsibility and Opinion

Answer: D
2. (E) Which of the following analyses appearing in a predecessor’s working papers is the
successor auditor least likely to be interested in reviewing?
A. Analysis of income statement accounts
B. Analysis of noncurrent assets and liabilities
C. Analysis of current assets and liabilities
D. Analysis of stockholders’ equity accounts

Answer: A

B, C, and D are incorrect because the auditor is concerned with the opening balances of
balance sheet accounts.

3. (D) Which of the following statements ordinarily is included among the written client
representations obtained by the auditor?

I. Management acknowledges that there are no material weaknesses in internal control.

II. Management is responsible for the proper presentation of the financial statements in
accordance with the applicable accounting framework
III. Management has the responsibility to form policies and procedures to prevent and detect
fraud.
IV. Sufficient evidential matter has been made available to permit the issuance of an unqualified
opinion.
V. The management team acknowledges its responsibility for the system of financial controls
VI. Compensating balances and other arrangements involving restrictions on cash balances have
been disclosed.
VII. Management acknowledges responsibility for illegal actions committed by employees.

Answer: II,III,V,VI
4. (D) For initial audit engagements, the auditor should obtain sufficient appropriate audit
evidence that:
I. The opening balances do not contain misstatements that materially affect the current
period's financial statements.
II. The prior period's closing balances have been correctly brought forward to the current
period or, when appropriate, have been restated.
III. Appropriate accounting policies are consistently applied or changes in accounting
policies have been properly accounted for and adequately disclosed.
 Answer: All of the above (I,II,III)

Refer to PSA 510

5. (D) Which of the following activities is/are associated with input stage?
I. Recording
II. Batching
III. Reporting
IV. Verifying

Answer: I,II, and IV

I, II, and IV are normally associated with the input stage.

HOUSE BARATHEON

1. (E) Arrange the following audit steps in order:

I. Assessing control risk
II. Assessing inherent risk
III. Determining detection risk
IV. Performing overall analytical procedures
V. Performing planning analytical procedures
VI. Performing substantive procedures
VII. Performing test of control
VIII. Prepare and deliver client communications

Answer: V, II ,I ,III ,VI ,VII , I, VIII

2. (A) The following explanatory paragraph was included in an auditor’s report to indicate a lack
of consistency:

“As discussed in Note 10 to the financial statements, the company changed its method of
computing depreciation in 2014.”

How should the auditor report on this matter if the auditor concurred with the change?
Location of additional

Type of paragraph (emphasis of

opinion matter/basis for modification)

A. Unqualified Before opinion paragraph

B. Unqualified After opinion paragraph

C. Qualified Before opinion paragraph

D. Qualified After opinion paragraph

ANSWER: B
 3. (D) The following transaction occurred during 2014:
a. Paid the annual 2013 P1 per share dividend on preference shares and P0.50 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2013.
b. Purchased 2,000 shares of its own outstanding ordinary shares for P20 per shares.
c. Reissued 700 treasury shares for equipment valued P25,000.
d. Issued 5,000 preference shares at P15 per share.
e. Declared a 10% stock dividend on the outstanding ordinary shares when the shares were
selling for P12 per share.
f. Issued the stock dividend.
g. Declared the annual 2014 P1 per share dividend on preference and P0.50 per share dividend
on ordinary shares. These dividends are payable in 2015.
h. Appropriated retained earnings for plant expansion, P300,000.
i. The net income for 2014 amounted to P470,000.

Based on the information above, determine the correct amount of December 31, 2014
appropriated retained earnings.

Answer and Solution: P326,000

Appropriated for plant expansion 300,000

Appropriated for treasury shares (2,000 – 700 = 1,300 x P20) 26,000
Balance, December 31, 2014 P326,000

4. (E) ABC Company has the following loans payable scheduled to be repaid in February of the
next year. The company’s accounting year ends on December 31.
 The company intends to repay Loan1 for P100,000 when it comes due in February the year
after next year. Two months after due date, the company intends to get a new loan for
P80,000 from the same bank.
 The company intends to refinance Loan 2 for P150,000 when it comes due in February next
year. The refinancing agreement of P180,000 will be signed in April, after the financial
statements for this year have been authorize for release.
 The company intends to refinance Loan 3 for P200,000 before it comes due in February next
year. The actual refinancing for P175,000 took place in January before the financial
statements for this year have been authorize for issue.

As of December 31 of this year, the total current liabilities to be reported on the company’s
statement of financial position should be:

Solution: 350,000

Current liabilities
Loan 2 150,000
Loan 3 200,000
Total P350,000

Noncurrent liabilities (Loan 1) P150,000

 5. (D) In the course of your first time audit of the December 31, 2014 financial statements of Eric
John Corp., you discovered that certain errors occurred in 2013 and 2014. No corrections were
made in 2013. Eric John Corp. started operations in 2013 with a paid-up capital of P500,000.
The following summarizes your audit findings:

A. The merchandise inventory at the end of 2013 was understated by P25,900 while the
merchandise inventory at the end of 2014 was overstated by P31,400.

B. Merchandise costing P24,000 was delivered on December 28, 2013 to Ivy Corp. and was
invoiced at normal gross profit based on sales which was 40%. The sale however was recorded
in 2014. The merchandise which were found in-transit as of December 31, 2013 was shipped
FOB Shipping Point and was excluded from the inventory.

C. A two-year fire insurance was purchased on May 1, 2013, for P72,000. The amount was
charged to prepaid insurance. No adjusting entry was made either in 2013 or 2014.

D. A one-year note receivable of P144,000 was held by Eric John Corp. beginning October 1,
2013. Payment of the 10% note and interest was received upon maturity. No accrual entry
had been made by the company related to the note on December 31, 2013.

E. A major repair costing P80,000 on an equipment with a remaining useful life of 10 years as of
January 1, 2013 was erroneously charged to repairs expense on January 1, 2013. Eric John
Corp. uses straight-line method in depreciating its equipment.

F. The unadjusted net income in 2013 and 2014 were at P215,500 and P342,100. Dividends paid in
2013 was P150,000. Dividends are yet to be declared in 2014.

What is the correct net income in 2014?

ANSWER: 197,200

HOUSE LANNISTER

1. (A) On December 31, 2013, ABC Company has a note payable to the bank of P8,400,000. The
following are the transactions during 2014 and other information relating to the Company’s
liabilities:
 The note payable to the bank bears a 12% interest. It is dated April 1, 2013 and is payable in
four equal annual installments beginning April 1, 2014. ABC Company made the first principal
and interest payment on April 1, 2014.
 On July 1, 2014, ABC Company issued P5,322,000 at P 6,000,000 face value not to a wealthy
shareholder. The note, dated July 1, 2014, will mature on July 1, 2015. No explicit interest rate is
stated in the note and the entire face amount is due on maturity date.

What is ABC Company’s total current liability on December 31, 2014?

Answer and solution: P8,328,00

Note Payable – Bank P2,100,000

Note Payable – Shareholder P6,000,000
 Discount on note payable (P678,000 x ½) (339,000) 5,661,000
Accrued Interest Payable (P6,300,000 x 12% x 9/12) 567,000
Total current liabilities P8,328,00
2. (E) PSA 315 requires the auditor to perform risk assessment procedures at:
I. Financial statement level
II. Assertion level for classes of transactions
III. Account balances
IV. Disclosures

Answer: I, II, III, IV

3. (A) The following costs were incurred by ABC Company during 2014.

Searching for applications of new research findings P57,000

Trouble-shooting in connection with the breakdowns
during commercial production 87,000
Adaption of an existing capability to a particular
requirement or customer’s need as a part of continuing 39,000
commercial activity
Engineering follow-through in an early phase of
commercial production 45,000
Radical modification of the formulation of a glassware 78,000
product
Laboratory research aimed at discovery of new 204,000
knowledge
Testing for evaluation of new products 72,000
Quality control during commercial production, including
routine testing of products 174,000
Materials consumed in research and development 177,000
projects
Consulting fees paid to outsiders for research and
development projects 300,000
Personnel costs of persons involved in research and
development projects 384,000
Indirect costs reasonably allocable to research and
development projects 150,000
Materials purchased for future research and 102,000
development projects
Research and development costs reimbursable under a
contract to perform research and development for XYZ 1,050,000
Corporation
Design, construction and testing of preproduction
prototypes and models 870,000
Routing on-going efforts to refine, enrich or otherwise
improve upon the qualities of existing product 750,000
P4,539,000

What is the total amount to be classified and expensed as research and development for
2014?

Answer and solution: 2,301,000

 Searching for applications of new research findings P57,000
Radical modification of the formulation of a glassware 87,000
product
Laboratory research aimed at discovery of new 204,000
knowledge
Testing for evaluation of new products 72,000
Materials consumed in research and development 177,000
projects
Consulting fees paid to outsiders for research and
development projects 300,000
Personnel costs of persons involved in research and
development projects 384,000
Indirect costs reasonably allocable to research and
development projects 150,000
Design, construction and testing of preproduction
prototypes and models 870,000
P2,301,000

4. (D) The following schedule of liabilities were provided to you by the accountant of Mhel Jon
Inc. in line with your audit of its various liabilities as of and for the period ended December 31,
2014:
Current Liabilities
Accounts payable (note a) P534,000
Premiums payable (note b) 242,000 P1,216,000
Noncurrent Liabilities
10%, Bonds payable(note c) P2,000,000
Lease Liability (note d) 3,000,000 5,000,000
Total Liabilities P6,216,000

Audit notes:
a. The purchases journal included the following transactions several days before and after
December 31, 2014
December Purchase Journal:
Purchase Receiving Amount Terms
Invoice Date Report
Number/Date
December 26, 2014 1012/Dec. 30, 2014 P50,000 FOB Destination
December 28, 1014/Jan. 2, 2015 40,000 FOB Shipping Point
December 30, 1015/Jan. 2, 35,000 FOB Destination
December 30, 1017/Jan. 4, 25,000 FOB Shipping Point
January Purchase Journal:
Purchase Receiving Amount Terms
Invoice Date Report Date
December 29, 2014 1013/Dec. 30, 2014 P65,000 FOB Destination
December 30, 1016/Jan. 3, 2015 40,000 FOB Shipping Point
January 2, 2015 1018/Jan. 5, 30,000 FOB Shipping Point
b. The premiums payable balance was the accrued amount in December 31, 2013 for a
promotional program the company has started in 2013. For every 5 product labels the
customer surrenders plus P50, the customer receives a specially designed wall clock which the
company purchases at a cost P160/unit. Details about the said promotional program in 2013
and 2014 are as follows:
2013 2014
Sales in units 50,000 60,000
Premiums purchased in units 3,000 6,000
Inventory of premiums at the
end of each year 1,200 2,100
The company estimates that from the labels issued with products sold, 40% shall be presented
for the said promotional plan redemption.

c. The 10%, convertible bonds payable maturing on December 31, 2015, were issued on January
1, 2013 at P2,050,000. The prevailing market rate of interest for similar securities at that time
without conversion option was at 12%. The issuance was recorded as a debit to cash for the
proceeds and credit to bonds payable at face value with the difference being charged to
interest expense. The bonds were convertible to ordinary shares (P1,000 bonds to 10, P50 par
value ordinary shares). Interest are payable on the bonds annually every December 31. On
December 31, 2014 after the payment of the annual interest which was recorded
appropriately, half of the bonds were converted to ordinary shares. The conversion is yet to be
recorded by Mhel Jon Inc.

d. The lease liability is for a five-year lease agreement for an equipment of Eric John Corp. on
January 1, 2014. The equipment which had a useful life of 10 years had a fair market value on
January 1, 2014 at P2,400,000. There is no provision to transfer ownership to Mhel Jon Inc. nor is
there an agreement for a bargain purchase option at the end of the lease term. The lease
agreement requires Mhel Jon Inc. to pay P600,000 annually starting December 31, 2014. The
implicit lease rate known to both parties was at 8% while the incremental borrowing rate was
at 10%. The lease was recorded by the company as a debit to equipment and a credit to
lease liability at P3,000,000 (the total payments to be made for the lease). The company is yet
to record the first lease payment made on December 31, 2014.

What is the correct accounts payable as of December 31, 2014?

Answer: 604,000

5. (E) As used in PSA 230, it refers to the record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached:

Answer: Audit Documentation

The cutoff assertion deals with whether transactions and events have been recorded in the
correct accounting period.
HOUSE TYRELL

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

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

Credit memos issued:

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

Credit memos received:

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

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

What is the inventory balance on December 31, 2014?

Answer and solution: 865,500

Inventory per count, December 26, 2014 P945,

000
Add (deduct) transactions, December 27 – 31, 2014
Cost of goods sold (P390,000 / 130%) (300,000)
Goods returned by customers on December 29 (P15,600 12,000
/ 130%)
Goods returned to suppliers on December 28 (6,000)
Purchases placed in stock 90,000
Purchases in transit, FOB shipping point 124,500
Inventory balance, December 31, 2014 P865,500

2. (A) An internal control system that is working effectively:

A. Eliminates risk and potential loss to the entity
B. Cannot be circumvented by management
C. Reduces the need for management to review exception reports on a day-to-day basis
D. Is unaffected by changing circumstances and conditions encountered by the entity

Answer: C
A is incorrect because some risks are unavoidable and others are too costly to eliminate.
B is incorrect because it is a basic limitation of internal control.
D is incorrect because changes in circumstances and conditions may require modification of
internal control.
3. (E) The sample size of a test of controls varies inversely with:
Tolerable Deviation Expected Deviation
Rate Rate
A. No No
B. Yes Yes
C. No Yes
D Yes No

Answer: D
Tolerable deviation rate is inversely related with sample size while expected deviation rate is
directly related to sample size.
4. (E) Your audit of Seibert Company’s property plant and equipment account disclosed the
following data as of December 31, 2014:

Original Date of Salvage Depreciation

Machinery Useful life
Cost purchase Value Method
Aye P700,000 2008 10 years P62,000 SYD
Bee 1,020,000 2009 15,000 hours 60,000 Working hours
See 1,600,000 2010 15 years 100,000 Straight-line
Dee 1,600,000 2012 10 years 100,000 Double-
declining

You have noted that the client’s policy in depreciating asset is to take no depreciation on the
year of purchase and full year’s depreciation on the year of disposal.

The following is a summary of the transactions in 2014:

A. On May 5, Machinery Aye was sold for P260,000 cash. The company’s bookkeeper recorded
this retirement in the following manner in the cash receipt journal:
Cash 260,000
Machinery 260,000

B. On December 31, 2104, it was ascertained that Machinery Bee had been used for a
cumulative number of hours of 13,100 hours, 2,100 of which was utilized in 2014. Starting 2014
however, the management revised its estimate of the total useful life of Machinery Bee from
15,000 hours to 18,000 hours with the salvage value being revised to P36,000.

C. On December 31, 2014, before computing for depreciation expense on Asset See, the
management decided that the asset’s remaining useful life is 10 years from January 1, 2014.

D. On December 31, 2014, it was discovered that the plant asset purchased in 2013 has been
charged to repairs expense in 2013. The asset costs P440,000 and had a useful life of 10 years
with no salvage value. Management has decided to use double declining balance method
for this asset and was referred to as machinery Eff.

Based on the information above and as a result of your audit:

What is the adjusted gain on sale of Machinery Aye?

 ANSWER: 82,000
5. (D) Which one of the following audit tests is/are not a valid analytical procedure method/s?
I. Performing comparison of depreciation per books and per recomputation
II. Comparing account balances to budgeted amounts
III. Examining documentation supporting disbursements
IV. Predicting account balances using regression analysis
V. Performing test of reasonableness of land inventory

Answer: III only

HOUSE TARGARYEN

1. (E) In an audit of ABC Company for the year ended December 31, 2015, the entity took its
annual physical inventory count on November 30, 2015. 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.

Data pertaining to November 30, 2015 inventory:

i. Direct labor included in the physical inventory amounted to P500,000.

ii. Overhead was applied at 200% of direct labor.
iii. The physical inventory on November 30, 2015 revealed that the book inventory of P2,913,500
was understated by P150,000. To avoid distorting the interim financial statements, the entity
decided not to adjust the book inventory until year-end.

What is the correct amount of physical inventory as of November 30, 2015?

Answer: P3,063,500

Inventory, November 30, 2015 P2,913,500

Understatement
150,000
Correct Inventory, November 30, P3,063,500
2015

2. (A) ABC Company constructs equipment for its own use. The account below is for a
manufacturing equipment it had assembled in 2010.

Equipment Ledger
Debit (Credit)
Cost of dismantling old equipment P43,440
Trade in value of the old equipment 36,000
Raw materials paid for the construction of new 228,000
equipment
Labor in construction of new machine 147,000
Cost of installation 33,600
Cost of testing the equipment 25,000
Materials spoiled in machine trial runs 7,200
Loss on construction (72,000)

An analysis of the details in the account disclosed the following:

  The old equipment, which was removed before the installation of the new one, had
been fully depreciated. The trade in value of the old equipment was applied as a
partial consideration on the purchased raw materials.
 Cash discounts received on the payments for materials used in construction totaling
P9,000 were reported in the purchase discounts account.
 The factory overhead account shows a balance of P876,000 for the year ended
December 31, 2010; this balance exceeds normal overhead on a regular plant
activities by approximately P50,700 and is attributable to equipment construction.
 A profit was recognized on construction for the difference between cost incurred and
the price at which the equipment could have been purchased.
 While testing the equipment, sample items were produced. These were sold for P5,000
which was credited to miscellaneous revenue.

What is the total cost of the new equipment?

Answer and solution: 513,500

Raw material used (P228,000 + 36,000 – P9,000 P255,000

discount)
Labor 147,000
Installation 33,600
Factory overhead 50,700
Materials spoiled in trial runs 7,200
Cost of testing 25,000
Net proceeds from sale of sample items (5,000)
Total P513,500
3. (D) One systems-oriented computer-assisted audit technique employed by auditors is the use
of test data. This technique would be used to (choose the incorrect):

I. produce flowcharts from the client’s source code

II. obtain knowledge of the client’s system
III. verify an account balance
IV. test internal controls

Answer: I, II and III

4. (D) The following information was taken from the records of ABC Company for the month of
December:

Sales P198,000
Sales returns 4,000
Additional markups 20,000
Markup cancellations 3,000
Markdowns 18,600
Markdown cancellations 5,600
Freight in 4,800
Purchases at cost 96,000
Purchases at retail 176,000
Purchases returns at cost 4,000
 Purchases returns at retail 6,000
Beginning inventory at cost 60,000
Beginning inventory at retail 93,000

What is the cost of ABC Company’s ending inventory under the retail inventory
(conventional) method?

Solution: 40,880

Cost Retail
Beginning inventory P 60,000 P 93,000
Purchases 96,000 176,000
Freight in 4,800
Purchases returns (4,000) (6,000)
Additional mark-ups 20,000
Mark-up cancellations (3,000)
GAFS (Conventional) 156,800 280,000
Markdowns (18,600)
Markdown cancellations 5,600
Goods available for sale P156,800 P267,000
Less: Net sales (P198,000 – P4,000) 194,000
Ending inventory at retail P73,000
Cost ratio (P156,800 / P267,000) 56%
Ending inventory at cost (P73,000 x 59%) P40,880
5. (A) The accounting records of Reizel Corp. which was organized in 2013 include only one
account for all intangible assets. The following is a summary of the items debited to the said
account in 2013 and 2014:

Date Particulars Amount

Jul. 1, 2013 Franchise (indefinite term) P1,260,000
Oct. 1 Lease advance payments (2-year term, 840,000
starting October 1, 2013)
Dec. 31 Net loss for 2013 including incorporation
fees, P30,000, and related legal fees of
organizing the business, P150,000.
480,000
Jan. 2, 2014 Purchased patent (10 year life) 2,220,000
Mar. 1 Cost of developing a recipe 2,250,000
Apr. 1 Purchased goodwill 8,352,000
Jul. 1 Legal fee for succesful defense of the
patent purchased in Jan 1, 2014 379,500

Audit note:
a. On December 31, 2013, the management estimates that the annual net future cash flows from
the franchise’s continued use was at P120,000. On December 31, 2014, this estimate was
revised due to decline in product demand to P100,000 annually.

b. On December 31, 2014, the estimated annual net future cash flows from the patent’s
continued use was at P337,822 for its remaining life.

c. The prevailing market rate of interest as of December 31, 2013 and 2014 was consistent at 12%.
Based on the above information and on your audit, answer the following requirements:

What is the total retroactive adjustment to retained earnings beginning in 2014 as a result of your
audit?

Answer: P845,000