Most direct check of accrued interest.
b. Verify the interest income by a calculation based on the face amount of notes and the
nominal interest rate
c. Verify the cost, carrying value, and market value of notes receivable
d. Compare the interest income with published interest investment records
6. The following are considered as the auditor's primary objectives in an audit of trading
securities, except:
a. To determine whether securities are properly classified on the balance sheet
b. To determine whether securities are the property of the client
c. To determine whether securities are authentic
Auditor tests existence, classification, ownership, but not “authenticity.”
d. To determine whether securities actually exist
7. When verifying investment income, the auditor should:
a. Recalculate market value adjustments
b. Match recorded income with dividend declarations or interest schedules Best method to
confirm accuracy.
c. Confirm securities with banks
d. All of the choices are correct
8. To establish the existence and ownership of an investment held by a corporation in the form
of publicly traded stock, the auditor should
a. Obtain written representations from management confirming that the securities are
properly classified as trading securities
b. Confirm the number of shares owned that are held by an independent custodian
Strongest evidence of ownership.
c. Determine that the investment is carried at the lower of cost or market
d. Inspect the audited financial statements of the investee company
9. Which of the following provides the best form of evidence pertaining to the annual valuation
of an investment in which the client owns a 35% voting interest?
a. Historical cost of the investee company's assets
b. Current fair value of the investee company's assets
c. Market quotations of the investee company's stock
d. Audited financial statements of the investee company
20–50% = equity method → valuation tied to investee FS.
10. Which assertion is most at risk when a company has highly liquid, actively traded securities?
a. Valuation
b. Completeness
c. Rights and obligations
d. Existence
11. The following statements are false, except?
a. Confirming investments with third-party custodians provides stronger audit evidence than
internal records
Direct confirmation > internal records.
b. If an equity security is held in a brokerage account, no further procedures are needed to
confirm existence.
c. Interest income from debt securities should be verified by recalculating interest based on
coupon rate and face value.
d. If a security's fair value declines significantly but recovers shortly after year-end, no
impairment needs to be recorded.
12. The correct classification of a security with a long-term maturity but likely to be sold in the
near term is:
a. Available-for-sale
b. Held-to-maturity
c. Trading
Likely to be sold in near term” → Trading
d. Short-term investment
13. When verifying investment income, the auditor should:
a. Match recorded income with dividend declarations or interest schedules
b. Recalculate market value adjustments
c. Confirm securities with banks
d. Choices A and B are correct
14. Which audit step helps ensure proper classification between FVPL and FVOCI?
a. Review management's intent and business model for holding the securities
b. Confirm market prices at year-end
c. Test authorization of purchases
d. Only choices A and C are correct
15. What does it imply if the Company has a significant unrealized loss on a security?
a. A need for reclassification to short-term
b. An overstatement of investment income
c. Impairment, if not expected to recover
d. A cut-off error
16. A sudden drop in the usage of a production machine should prompt the auditor to:
a. Assess for potential impairment
b. Confirm the asset with the supplier
c. Review the asset's historical cost
d. Recalculate accumulated depreciation
17. A key risk when auditing repairs and maintenance expense is that:
a. Useful lives of assets may be overstated
b. Depreciation expense is duplicated
c. Capital expenditures may be recorded as expenses
d. All of the above
18. Which situation should prompt the auditor to suspect undisclosed PPE disposals?
a. Consistently increasing PPE balances
b. A decrease in depreciation expense with no major disposals recorded Indicates assets
removed but not disclosed.
c. Consistently increasing PPE balances
d. Increase in repairs and maintenance expense
19. If PPE is revalued, which audit procedure is most appropriate? J
a. Evaluating the qualifications and assumptions of the value
b. Verifying that accumulated depreciation is recalculated
c. Confirming the asset with suppliers
d. Only choices A and B are correct
20. Capital work-in-progress (CWIP) should be tested primarily for?
a. Accuracy and proper classification
b. b. Timely depreciation
c. Disposal recognition
d. Only choices A and B are correct
21. The best way to verify an allowance for doubtful accounts is reasonable is to:
a. Trace additions to the "other assets" account to search for equipment that is still on hand
but no longer being used
b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item
of equipment the year
c. Select certain items of equipment from the accounting records and locate them in the
plant
d. Inspect certain items of equipment in the plant and trace those items to the accounting
records
22. Which questionable practice would an auditor detect during his physical verification at the
Company's production facility?
a. Necessary facility maintenance has not been performed
b. Overhead has been underapplied
c. Insurance coverage on the facility has not been finalized
d. Depreciation expense on fully depreciated machinery has been recognized
23. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
a. Accounts payable
b. Gain on disposal of equipment
c. Depreciation expense
d. Repairs and maintenance expense
Capitalizable items may be expensed incorrectly.
24. The following statements are false, except?
a. A difference between the fixed asset register and the general ledger should always be
investigated during an audit.
b. Assets pledged as collateral must be disclosed in the notes to the financial statements,
even if the loan is not in default.
c. Observing physical assets is sufficient audit evidence for ownership of property, plant,
and equipment.
d. Assets under construction should begin being depreciated as soon as they are
capitalized.
25. If the auditor finds that a building has not been depreciated for the year, what is the most
appropriate next step?
a. Inquire whether it is fully depreciated
b. Evaluate whether the asset was available for use Depreciation begins when available for
use.
c. Verify whether the asset was sold
d. Choices B and C are correct
26. I. The fair value of land should be adjusted every year under the cost model. II. The auditor
should examine whether assets are appropriately grouped for depreciation purposes.
III. A change in depreciation method is considered a change in accounting policy.
a. All statements are true
b. Only statement II is true
c. Only statement III is true
d. Only statement II and III are true
27. A revaluation surplus should be recorded in which section of the financial statements?
a. Revaluation reserve in revenue
b. Revaluation reserve in other income
c. Revaluation reserve in retained earnings
d. Revaluation reserve in equity
Always recorded in equity, not income.
28. I. PPE that is idle or retired from active use should still be included in the financial
statements if the entity retains control.
II. When testing for completeness, reviewing lease agreements may help identify
unrecorded leased assets.
III. A significant increase in capital work-in-progress (CWIP) may indicate potential delays
in project completion or cost overruns.
a. All statements are true
b. Only statement III is true
c. Only statements I is true
d. Only statement II and II are true
29. PPE disposals should be tested to ensure that:
a. The disposal was properly authorized
b. The asset was derecognized and any gain/loss recorded
c. The original cost was expensed
d. Only choices A and B are correct
Check authorization + derecognition
30. If an asset is idle and not generating cash flows, what should the auditor consider?
a. Revision of depreciation policy
b. Change in useful life estimation
c. Writing off the asset
d. Trigger for impairment testing Idle assets may be impaired.
Problem Solving: Please refer to the problem below for questions 37-40.
a.) The audit team was assigned to audit the Property, plant and equipment account of God
Access Corp for the period ended December 31, 2024. The following schedule was provided:
Account Title Amount Depreciation
Method
Useful life Salvage value
Land 3,600,000
Building 7,800,000 Double declining
method
20 years 10%
Office equipment 3,000,000 Straight line
method
8 years
Accumulated
dep- Bldng
(1,482,000)
Accumulated
dep-OE
(750,000)
All assets are acquired at the start of operation, in January 2022. Additional transactions follow:
i. New elevator system amounting to P1,000,000 was installed and was completed in early
March.
ii. On November 1, an office equipment was sold for P1.8M, it had an original cost of P2.5M.
iii.On November 11, a replacement office equipment was acquired on installment basis for
P2.5M. A P300,000 down-payment was made, remaining balance is to be paid for three equal
installments starting November 30, 2023. The interest rate appropriate for this transaction
was ascertained at 10%. Installation cost was P25,950.
31. How much is the total depreciation expense for Building and Improvements as of
December 31, 2024? ₱724, 392.59
32. How much is the accumulated depreciation for office equipment as of December 31,
2024? ₱240, 123.96
b.) On the first-year audit of PhilGo Corporation's financial statements, the engagement
team obtained the following information relative to the entity's investments were unaccounted:
● The entity purchased marketable securities for P3,500,000 on March 16, 2024. On the
date of purchase, it has been decided that these securities are not bound to be sold until
favorable circumstances arise, in which the company could not ascertain. Transaction
cost for the said securities amounted to P165,350,
● Equity securities were purchased from Focuson Corporation for P5,900,000 on
November 6, 2024. The supporting document revealed 250,000 shares were purchased
out of the total 1,350,000 shares owned by the company as of November 2024.
● On December 27, 2024, FocusOn Corporation declared dividend of P3.20 per share and
paid it off on the immediately succeeding month.
● One of PhilGo Corp.'s board members were appointed as FocusOn Corp.'s CFO,
effective on December 2, 2024.
● Market value of the marketable securities as of 12/31/24 amounted to P3,025,000.
31. How much is the total investment account to be reported in the financial statements as
of 12/31/24?
32. How much should be reported under Profit/Loss in the company's Statement of Income
for the year ended 12/31/24?
33. How much should be reported under Other Comprehensive Income for the year ended
12/31/24? ₱0
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