REGIONAL MIDYEAR CONVENTION

ACADEMICS ARM
AUDIT CUP

EASY ROUND
1. A practitioner is associated with financial information when
I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a professional connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

2. Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information

3. A direct financial interest or a material indirect financial interest in the audit client of a member of the
audit team or his immediate family member may create a significant self-interest threat. Which of the
following safeguards would be least likely considered to eliminate the threat or reduce it to an
acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a member of the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the
remaining interest is no longer material prior to the individual becoming a member of the audit team.
D. Remove the member of the audit team from the audit engagement.

4. Holding a financial interest in an audit client may create a self-interest threat. The existence and
significance of any threat created depends on
I. The role of the person holding the financial interest.
II. Whether the financial interest is direct or indirect.
III. The materiality of the financial interest.
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.

5. The December 31 year-end financial statements of SAMOA COMPANY contained the following errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire
amount was charged to expense in 2014. In addition, on December 31, 2015, a fully depreciated machinery
was sold for P75,000 cash, but the sale was not recorded until 2016. There were no other errors during 2014
and 2015, and no corrections have been made for any of the errors. Ignore income tax effects.

What is the total effect of the errors on Samoa’s 2015 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement
 6. Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile, Inc. for
the year ending December 31, 2015. After obtaining an understanding of the client’s design of the
accounting and internal control systems and their operation, he then proceeded in performing test of
controls related to production cycle.

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

7. An entity provided the following trial balance on June 30, 2015:

Cash overdraft ( 200,000) Property, plant and equipment, net 1,900,000
Accounts receivable, net 700,000 Accounts payable and accrued expenses 640,000
Inventory 1,200,000 Share capital 3,000,000
Prepaid expenses 200,000 Share premium 500,000
Land held for resale 2,000,000 Retained earnings 1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash overdraft of
P200,000. The checks were mailed on July 9. Land held for resale was sold for cash on July 15. The financial
statements were issued on July 31. On June 30, 2015, what total amount should be reported as current assets?
a. 4,500,000
b. 4,100,000
c. 4,300,000
d. 2,500,000

8. An entity had the following liabilities on December 31, 2015:

Accounts payable 55,000
Unsecured notes, 8% due 7/1/2016 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred tax liability 25,000
Senior bonds, 7%, due 3/31/2016 1,000,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the entity. The legal
counsel expects the suit to be settled in 2016 and has estimated that the entity will be liable for damages in the
range of P450,000 to P750,000. The deferred tax liability is expected to reverse in 2016. What amount should
be reported on December 31, 2015 for current liabilities?
a. 515,000
b. 940,000
c. 1,490,000
d. 1,515,000
 9. An entity reported net income of P7,410,000 for the current year. The auditor raised questions about the
following amounts that had been included in net income:
Unrealized loss on equity investments at fair value through other comprehensive
income ( 540,000 )
Gain on early retirement of bonds payable 2,200,000
Adjustment of profit of prior year for error in depreciation, net of tax effect ( 750,000 )
Loss from fire ( 1,400,000 )
Gain from change in fair value attributable to the credit risk of financial liability
designated at fair value through profit or loss 500,000
What amount should be reported as adjusted net income?
a. 6,500,000
b. 7,200,000
c. 8,200,000
d. 8,700,000

10. In 2015, an entity purchased property with natural resources for P28,000,000. The property had a
residual value of P5,000,000. However, the entity is required to restore the property to the original
condition at a discounted amount of P2,000,000. In 2015, the entity spent P1,000,000 in development
cost and P3,000,000 in building. In 2016, an amount of P4,000,000 was spent for additional
development on the mine. Production began in 2016 and the tons extracted totaled 3,000,000 in 2016
and 2,500,000 in 2017. The remaining tons totaled 7,000,000 and 3,500,000, respectively on December
31, 2016 and December 31, 2017. What amount of depletion should recognized in 2017?
a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000

AVERAGE ROUND

1. Which of the following conditions are generally present when misstatements due to fraud occur?
I. Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

2. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.
 3. Which of the following is not an audit procedure that the independent auditor would perform with
respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for litigation, claims, and
assessments.
B. Obtain from management a description and evaluation of litigation, claims, and assessments that
existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted claims that the lawyer has
advised are probable of assertion and must be disclosed.
D. Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.

4. Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control risk.
B. Considering unusual or unexpected account balances that were not previously identified.
C. Gathering evidence concerning account balances that have not changed from the prior year.
D. Performing tests of transactions to corroborate management’s financial statement assertions.

5. An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes

DIFFICULT ROUND

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

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

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

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

The HVR Company included the following in its notes receivable as of December 31, 2015:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000
 2. The following transactions during 2015 and other information relate to the company’s notes receceivable:

a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land, purchased 10 years ago, was carried on HVR’s books at
P1,500,000. HVR received a noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31, 2016. There was no
established exchange price for the land. The prevailing interest rate for this note on January 1, 2015 was 10%.

b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange for the consultation services rendered. The note will
mature on December 31, 2017, with interest receivable every December 31. The fair value of the services rendered is not readily determinable.
The prevailing rate of interest for a note of this type was 10% on January 1, 2015.

c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of P4,800,000, receiving P7,200,000 note. The note bears an
interest rate of 4% and is to be repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first
payment on December 31, 2015. There is no established market value for the equipment. The market interest rate for similar notes was 14% on
January 1, 2015.

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

What amount of consultation fee revenue should be recognized in 2015?

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

3. When a close family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter information of the assurance engagement, threats to independence may be
created. If the threats are other than clearly insignificant, which of the following safeguards can be applied to reduce the threats to an
acceptable level?
I.Removing the individual from the assurance team.
II.Where possible, structuring the responsibility of the assurance team so that the professional does not deal with matters that are within the
responsibility of the close family member.
III.Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that
concerns them.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

4. Which of the following statements concerning publicity is incorrect?

A.Booklets and other documents bearing the name of a professional accountant and giving technical information for the assistance of staff or
clients may be issued to such persons, other professional accountants or other interested parties.
B.Professional accountants who author books or articles on professional subjects may state their name and professional qualifications; give
the name of their organization; and give any information as to the services that the firm provides.
C.Appropriate newspapers or magazines may be used to inform the public of the establishment of a new practice, of changes in the
composition of a partnership of professional accountants in public practice, or of any alteration in the address of a practice.
D.A professional accountant may develop and maintain a website in the Internet in such suitable length and style which may also include
announcements, press releases, publications and such other necessary and factual information.

5. The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus accrued interest. The bonds were dated July 1, 1999;
interest payable semiannually on January 1 and July 1; redeemable after June 30, 2004 to June 30, 2007, at 101, and thereafter until
maturity at 100; and convertible into P10 par value common stock as follows:

Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.
From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.
After June 30, 2007, at the rate of 4 shares for each P1,000 bond.

The bonds mature 10 years form their issue date. The company adjust its books monthly and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds:

2005
July 1P2,000,000 of bonds were converted into stock.

2006
Dec 31P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were immediately retired.
2007
July 1The remaining bonds were called for redemption and accrued interest was paid. For purposes of obtaining funds for redemption and
business expansion, an P8,000,000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2007, and are due in 20 years.

Questions
1. What is the carrying value of bonds payable at December 31, 1999?
a. P 5,747,280 b. P 6,000,000 c. P 5,753,760 d. P 5,749,440