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NATIONAL MOCK BOARD EXAMINATION 2017

AUDITING

CASE 1

1. What earnings figure should be used for determining basic EPS?

a. Consolidated net profit after tax attributable to parent

b. Consolidated profit after tax

c. A and B

d. None of the choices

2. For the year ended December 31, 2016, the following information relates to GG Ltd.:

- Profit for the year was P900,000

- No preference dividends were declared during the year

- 1,000,000 10% cumulative shares of P1 (classified as equity) were on issue for the entire year

Earnings used to determine Basic EPS will be?

P800,000

a. P900,000

b.

c. P1,000,000

d. None of the choices

3. For the year ending December 31, 2016, the following data relates to GG Ltd.

1. At January 1, there were 200,000 ordinary shares on issue

2. 100,000 fully paid ordinary shares issued on March 1

3. 25,000 ordinary shares repurchased on August 1

4. 70,000 partly paid ordinary shares issued on October 1, for P2.00 partly paid to P1.30, with right to participate in dividends in proportion to the amount paid relative to the issue price

5. 1,000,000 10% cumulative preference shares of P1.00 (classified as equity) were on issue for the entire year

Which items above will have an impact on the WANOS outstanding during the year for basic EPS?

a.

Items 1 to 2

b.

Items 1 to 3

4. Following the information in item 3:

c. Items 1 to 4

d. Items 1 to 5

70,000 partly paid ordinary shares issued on October 1 for P2.00 partly paid to P1.30, with right to participate in dividends in proportion to the amount paid relative to the issue price.

Question: How are these incorporated into the weighted average ordinary share calculation for basic EPS?

a.

Excluded from the calculation as they are not fully paid up

b.

Weighted as if they were fully paid up on the date that the first installment was receivable

c.

Weighted based on their paid up portion each partly paid share would represent 0.65 (i.e., P1.30/P2.00) ordinary shares

d.

None of the above

5. For the year ending December 31, 2016:

At January 1 there were 800,000 ordinary shares on issue

On March 1 200,000 fully paid ordinary shares were issued by way of rights issue, providing one share for each four shares held in return for payment of P1.50 What information is needed to determine whether the rights issue contains a bonus element?

a.

Original issue price

b.

Fair value of shares prior to exercise

c.

Profit for the year (excluding preference share impact

d.

All of the above

Use the following information for the next 2 items

IAS 33 requires diluted EPS be calculated where an entity has on issue potential ordinary shares that are dilitive.

In assessing whether potential ordinary shares are dilutive:

6. What measure of profit do we use?

a.

Total profit/loss

b.

Profit/loss from continuing operations

c.

Profit/loss from discontinuing operations

d.

All of the above

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7.

How are different instruments assessed?

a.

Assess each independently

b.

Depends on accounting policy

c.

In series from most dilutive to least dilutive

d.

All of the above

CASE 2 You were assigned to audit Rolling Corp.’s property, plant and equipment for the year ended December 31, 2015. The following information were made available:

Balances as of January 1, 2015:

 

Accumulated

 

Cost

Depreciation

Land

P5,000,000

Building

10,000,000

P3,150,000

Factory Equipment

8,000,000

3,904,000

Automotive Equipment

5,000,000

2,700,000

All of the company’s properties were acquired upon the commencement of the operations three years ago (from January 1, 2015) and remained the same until the current year. The depreciation were computed based on the following methods and useful lives. Salvage value is assumed to be at 10% of the assets’ cost.

 

Depreciation Method

Useful Life

Building

SYD

15 years

Factory Equipment

Double-declining

10 years

Automotive Equipment

Straight-line

5 years

The following transactions occurred during the year:

a. A new factory equipment was acquired on June 1, replacing an old factory equipment originally acquired at P1,500,000, and was disposed on the same date at P250,000. The new equipment was acquired at P2,000,000 payable 50% down payment, with the balance payable in four equal installments every June 1 starting the next year. Freight and unloading cost amounted to P50,000. Installation cost amounted to P70,000. The company estimates that it will incur significant dismantling cost upon the retirement of the same factory equipment. Future estimated dismantling cost is at P227,041. The market rate of interest that reflects all transactions on this date was at 10%.

b. On August 1, a new automotive equipment was traded in for an old one which was originally acquired at P1,000,000. The company paid P500,000 in the trade-in. The new automotive equipment had a cash price of P1,200,000.

c. Significant improvements on the ventilating system and electrical wiring system of the building were made at the beginning of the current year. Total cost incurred were P400,000 for the ventilating system and P380,000 for electrical wiring system. The improvements have no salvage value.

Requirements:

8. What is the correct gain/loss on disposal of the factory equipment on June 1?

a.

454,000

c. 518,000

b.

250,000

d. 377,200

9. What is the correct depreciation expense on the building for 2015?

a.

1,020,000

c. 1,008,000

b.

978,000

d. 900,000

10. What is the correct depreciation expense on the factory equipment for 2015?

a.

962,933

c. 908,933

b.

938,933

d. 1,065,600

11. What is the correct depreciation expense on the automotive equipment for 2015?

a.

915,000

c. 1,016,667

b.

925,000

d. 936,000

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12. The auditor may conclude that depreciation charges may be insufficient if he or she notes:

a.

Excessive recurring losses on retired assets.

b.

Large amounts of fully depreciated assets.

c.

Continuous trade-ins of relatively new assets.

d.

Insured values greatly in excess of book values.

CASE 3 You are auditing the cash account of Carrera Inc. for the fiscal year ended July 31, 2014. The client has not prepared the July 31, bank reconciliation. The following information were made available:

 

General Ledger

Bank Statement

Beginning balances Deposits Cash receipts journal Checks clearing the bank Cash disbursements journal July bank service charge Note paid by the bank NSF check Ending balances

P140,330

P172,590

751,680

763,680

 

(708,450)

(654,330)

 

(2,610)

(183,000)

(9,330)

P249,680

P20,880

Audit notes:

a. Bank reconciliation in June included the following information: Bank statement balance, June, P172,590; Deposits in transit, P18,000; Outstanding checks, P52,260, and; Balance per general ledger, June, P140,330.

b. Checks clearing the bank in July, outstanding by the end of June was at P50,760.

c. Checks clearing the bank in July and were recorded in the July cash disbursement journal was at

P614,010.

d. A check for P31,800 cleared the bank, but had not been recorded in the cash disbursement journal. It was for a payment of an accounts payable.

e. A check for P11,880 was erroneously charged by the bank to Carrera Inc.

f. Deposits included P18,000 from June and P733,680 from July.

g. The bank charged Carrera Inc.’s account for a non-sufficient-fund check totaling

to P9,330. The

credit manager concluded that the customer intentionally closed its account and the owner left the

city. The check was turned over to a collection agency.

h. A note for P174,000, plus interest, was paid directly by the bank under an agreement signed four months ago. The note payable was recorded at P174,000 on Carrera Inc.’s books.

Required: Based on your audit procedures and appreciation of the above data, answer the following:

13. How much is the total outstanding checks as of July 31?

a.

41,820

c. 29,940

b.

32,490

d. 10,020

14. How much is the deposit in transit as of July 31?

a.

30,000

c. 18,000

b.

20,940

d. 27,330

15. What is the correct cash in bank balance as of July 31?

a.

20,940

c. 32,820

b.

11,160

d. 9,060

16. How much is the cash in bank shortage as of June 31?

a.

2,000

c. 2,200

b.

1,200

d. None

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17. A cash shortage may be concealed by transferring funds form one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?

a.

Simultaneous verification.

b.

Simultaneous confirmations.

c.

Simultaneous bank reconciliations.

d.

Simultaneous surprise cash count.

CASE 4

Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2015. All the financial asset were acquired in 2015:

Financial asset

Acquisition Cost

Aye Corp. Stocks, 20,000 shares

P590,000

Bee Inc. Stocks, 40,000 shares

1,100,000

See Co. 10%, P2M bonds

1,973,000

Dee Corp. Stocks, 50,000 shares

2,400,000

Audit notes:

a.

Aye Corp. shares were acquired with an intention of generating short-term profits from the share price’s fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker’s fees and commissions. The shares were acquired on February 20, 2015. A P2 per share cash dividends were received on March 30. These dividends were declared by Aye Corp. on January 20, 2015 to stockholders as of record date March 1, 2015.

b.

The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of Bee Inc. on March 1, 2015. These shares were acquired for trading purposes. A P3 per share dividends were received from the said shares on May 3, 2015. These dividends were declared on April 1 to stockholders as of record date April 20.

c.

See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on October 1, 2015 at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%. The bonds shall mature on December 31, 2017. The company has a business model of holding debt securities for short-term profits.

d.

Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and commissions on June 30, 2015. Dee Corp. had a total of 200,000 shares outstanding on the same date. The company received P5 dividends per share form Dee on December 20, 2015.

e.

The following information were deemed relevant at year-end and no entries had been made yet by the company to reflect any of the following information:

 

Aye Corp.

Bee Inc.

See Co.

Dee Corp.

 

Net income in 2015 Fair Value

P1,200,000

P35/sh

P1,500,000

P2,000,000

P2,240,000

P25/sh

11%

P51/sh

Requirements:

 

18.

What is the unrealized holding gain/loss to be reported in the 2015 statement of comprehensive income?

 

a. 121,948

 

c. 1,948

b. 51,948

d. 122,750

 

19.

What is the correct carrying value of investments that should be presented as current asset?

 

a.

3,664,948

c. 3,665,750

 

b.

3,543,000

d. 3,765,250

20.

What is the correct carrying value of investment in Dee Corp. shares that should be presented in the 2015 Statement of Financial Position?

 

a.

2,430,000

c. 2,280,000

 

b.

2,150,000

d. 2,550,000

21.

Assuming that the company’s business model regarding debt securities has an objective of collecting contractual cash flows, what is the correct carrying value of investment in See Co. Bonds that should be presented in the 2015 Statement of Financial Position?

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a. 1,930,690

c. 1,965,750

b. 1,932,690

d. 1960,960

22. Assuming that the Dee Corporation shares are publicly traded shares and are regarded as long-term investment by the client, the auditor should establish existence and ownership by:

a.

Confirming the number of shares owned that are held by an independent custodian.

b.

Corresponding with the investee company to verify the number of shares owned.

c.

Inspecting the audited financial statements of the investee company.

d.

Determining that the investment is carried current fair market value.

CASE 5 Pabebe Company is a domestic corporation operating in the Philippines for the first time this 2015. Since April 15, 2016 is fast approaching, Pabebe Company is in the process of preparing the reconciliation of income per books with income per income tax return for its first year of operations the year ended December 31, 2015. The format below will be used by the Company in preparing its income tax computation:

Book income before income taxes

Add:

Future deductible amounts

Less:

Future taxable amounts

Taxable income

Data below were gathered by the Company:

a)

Pabebe Company acquired an equipment at a cost of P500,000 on January 1, 2015. Depreciation was recorded using the straight-line method with no expected residual value for an estimated useful life of 5 years. For income tax purposes, the double-declining balance method was used. The carrying amount and tax base of the said equipment were P400,000 and P300,000, respectively.

b)

Sales, cost of sales, operating expenses are recognized under the accrual method for both financial and income tax reporting purposes, except for the following items:

i.

Rent income is recognized for financial reporting under PAS 17 while for income tax purposes rent income is recognized when collected. In 2015, Jam Company reported rent income of P140,000, while rent collected totaled to P90,000. The Company recognized a Rent receivable amounting to P50,000 based on PAS 17.

ii.

Warranty costs are recognized for financial reporting purposes under the accrual method and provide an expense equal to 5% of sales. For income tax purposes, warranty costs are recognized when actual payment is made. Total warranty expenditures incurred for 2015 was P320,000. At year end, Pabebe Company reported an estimated warranty obligation of P40,000.

iii.

Bad debts expense reported during the year for financial reporting was P65,000.

For income tax

purposes, bad debts are recognized as deductions only upon actual write-off which amounted to P30,000 during the year. The carrying amount and tax base of the receivables were P200,000 and

P235,000, respectively.

c)

Current and future regular income tax rate is 30%.

d)

Per Company’s estimate, it is probable that future taxable income will be available against which the future deductible amounts, any unused tax losses and unused tax credits can be utilized.

e)

Net income before income tax was determined to be P50,000.

Applying PAS 12 Income Taxes, determine the following items:

23. Temporary difference resulting into future deductible amounts in 2015 is

a.

75,000

b.

85,000

c.

140,000

d.

150,000

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24. Temporary difference resulting into future taxable amounts in 2015 is

a.

125,000

b.

135,000

c.

140,000

d.

150,000

25. The deferred tax liability reported in the December 31, 2015 statement of financial position is

a. 15,000

b.

22,500

c.

30,000

d.

45,000

26. The deferred tax asset reported in the December 31, 2015 statement of financial position is

a. 15,000

b.

22,500

c.

30,000

d.

45,000

CASE 6 Doha Corporation was organized in 2014. Its accounting records include only one account for all intangible

assets.

The following is a summary of the entries that have been recorded and posted during the years

2014 and 2015:

7/1/14

Intangibles Franchise expiring on June 30, 2022

P252,000

10/1

Advance payment on lease expiring on October 1, 2016

168,000

12/31

Net loss for 2014 including incorporation fee, P6,000, and

related legal fees of organizing the business, P30,000 (all incurred in 2014)

96,000

1/2/15

Acquired patent with a useful life of 10 years

444,000

3/1

Cost of developing a secret formula

450,000

4/1

Goodwill purchased

1,670,400

7/1

Legal fees for successful defense of patent purchased on

75,900

1/2

10/1

Research and development costs on a new project

960,000

Required: Ignoring income tax effects, determine the following:

27. The unamortized patent cost at December 31, 2015:

a. 399,600

c. 444,000

b. 470,880

d. 394,980

28. The unamortized franchise cost at December 31, 2015:

a.

204,750

c. 189,000

b.

220,500

d. 236,250

29. The adjusting entries on December 31, 2015, should include a retroactive adjustement to the beginning retained earnings account at:

a.

132,750

c. 120,750

b.

84,000

d. 1,778,550

30. As a result of the adjustments at December 31, 2015, the total charges against income of 2015 should be:

a.

1,645,800

c. 1,195,800

b.

1,681,800

d. 1,682,550

31. In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether amortization period is reasonable in support of management’s financial statement assertion of:

a.

Valuation

b.

Existence

c.

Completeness

d.

Rights and obligation

CASE 7

32. The word auditing comes from the Latin audire, which means:

A. To see

B. To detect

C. To hear

D. To test

33. To operate effectively, an internal auditor must be independent of:

a.

The line functions of the organization.

b.

The entity.

c.

The employer-employee relationship which exists for other employees in the organization.

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d.

All of these.

34. Which of the following statements best describes the relationship between an external auditor and an internal auditor?

a.

An internal auditor is more likely to be concerned with internal accounting control; while an external auditor shall be more interested with operational auditing.

b.

Although the internal auditor and external auditor have differences in the independence of their positions, they nevertheless serve similar types of interests.

c.

Both the internal auditor and external auditor have the same degree of concern about financial status and results of operations.

d.

The practitioners in the two fields use basically an identical approach; however, there are differences in the application of auditing techniques.

35. In government auditing, the three elements of expanded scope auditing are:

a.

Goal analysis, audit of operations, audit of systems.

b.

Financial and compliance, economy and efficiency, program results.

c.

Pre-audit, post-audit, internal audit.

d.

National government audit, local government audit, corporation audit.

36. The objective of an audit of financial statements is to enable the auditor to express an opinion whether:

a.

the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.

b.

the company is financially viable and profitable.

c.

there is any fraud committed on part of management and employees.

d.

acts of non-compliance were committed in the conduct of the company’s operations.

37. The best statement of the responsibility of the auditor with respect to audited financial statements is:

a.

The auditor’s responsibility on fair presentation of financial statements is limited only up to the date of the audit report.

b.

The auditor’s responsibility is confined to his expression of opinion about the audited financial statements.

c.

The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements.

d.

The auditor is responsible only to his qualified opinion but not for any other type of opinion.

38. The punishment, upon conviction, for any person who has violated any of the provisions of the

Accountancy Act of 2004, or any of its Implementing Rules and Regulations as promulgated by the Board of Accountancy:

a.

A fine of not less than fifty thousand pesos (P50,000.00) and imprisonment for a period not exceeding two (2) years.

b.

A fine of not less than fifty thousand pesos (P50,000.00) but not an imprisonment.

c.

No fine but an imprisonment for a period not exceeding two (2) years.

d.

A fine of not less than fifty thousand pesos (P50,000.00) or imprisonment for a period not exceeding two (2) years, or both.

39. A CPA whose certificate has been revoked:

a.

Is required to take the CPA Board Licensure examinations before reinstatement

b.

May be reinstated by the BOA after the expiration of 2 years from the date of revocation

c.

Can no longer be reinstated as a Certified Public Accountant

d.

Has committed a crime involving moral turpitude

40. Any candidate who fails in

complete CPA Board Examinations shall be disqualified from taking

another set of examinations unless he/she submits evidence to the satisfaction of the BOA that he/she

enrolled in and completed at least

a. 3, 15 units per year for a total of 60 units

b. 2, 24 units

c. 2, 15 units per year for a total of 60 units

d. 3, 24 units

of subjects given in the licensure examination.

41. Quality control policies and procedures are designed to promote an internal culture recognizing that:

a.

Quality is essential in performing engagements.

b.

Reasonable, and not absolute, assurance can be provided by all CPA engagements.

c.

The firm should always move towards the elimination of audit risk.

d.

The promotion of a quality-oriented internal culture depends on clear, consistent and frequent actions and messages from all levels of the firm’s management.

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42. S1 Where internal technical and training resources are unavailable, the firm may use a suitably qualified external person for that purpose. S2 Smaller firms, in particular, may employ more formal methods of evaluating the performance of their personnel.

43. The

A.

True, false

B. False, true

C. True, true

senior

auditor responsible

for coordinating the

field

work

conference with the audit team primarily to

usually

D. False, false

schedules

a

pre-audit

a.

Give guidance to the staff regarding both technical and personnel aspects of the audit.

b.

Discuss staff suggestions concerning the establishment and maintenance of time budgets.

c.

Establish the need for using the work of specialists and internal auditors.

d.

Provide an opportunity to document staff disagreements regarding technical issues.

44. Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

a.

Coordinating the assistance of entity personnel in data preparation.

b.

Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.

c.

Selecting a sample of vendor’s invoices for comparison to receiving reports.

d.

Reading the current year’s interim financial statements.

45. Which statement is correct relating to a potential successor auditor’s responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?

a.

The successor auditors have no responsibility to contact the predecessor auditors.

b.

The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.

c.

The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact.

d.

The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.

46. Which of the following cases illustrate a violation of the provisions of RA9298 and its IRR regarding the rule on temporary and special permits?

a.

A, foreign CPA, is internationally recognized as one of the foremost experts in computerized fraud audits. In the judgment of the Board of Accountancy, obtaining the services of A is essential for the advancement of accountancy in the Philippines. A is granted a temporary/special permit to provide training to Filipino auditors regarding the finer points of his specialization, and his permit is restricted to this particular engagement.

b.

B, foreign CPA, is called for a specific purpose which, in the judgment of the Board of Accountancy, is essential for the development of the country. B is granted a temporary/ special permit to practice for the particular work that he is being engaged. This, despite the fact that Z, a Filipino CPA, is qualified and available for such specific purpose.

c.

C, foreign CPA, is called for consultation, which, in the judgment of the Board of Accountancy, is essential for the development of the country. C is granted a temporary/ special permit to practice

for the particular consultation that she is being engaged. There is no Filipino CPA qualified for such

consultation.

d.

D, foreign CPA, is engaged as professor in special international accounting modules which are essential to accountancy education in the Philippines. She was given a temporary/special permit which restricts her practice to teaching special international accounting standards.

47. Which of the following is a correct response of the auditor when he allows a lower acceptable level of detection risk?

Nature of substantive tests

Timing of substantive tests

Extent of substantive tests

A.

Less effective

Year-end

More extensive

B.

Less effective

Interim

Less extensive

C.

More effective

Year-end

More extensive

D.

More effective

Interim

Less extensive

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48. A control that reduces the risk that an existing or potential control weakness will result in a failure to

meet a control objective is referred to as a

A. conditional

B. limited

control.

C. compensating

D. offset

49. Which of the following best describes encryption?

a. The electronic transmission of documents between organizations in a machine-readable form.

b. The process of transforming programs and information into a form that cannot be understood without access to specific decoding algorithms.

c. A combination of hardware and software that protects a WAN, LAN or PC from unauthorized access through the Internet and from the introduction of unauthorized or harmful software, data or other

material in electronic form.

d. A communications network that serves users within a confined geographical area.

CASE 8 In connection with your audit of ALMA MORENO Corporation for the year ended December 31, 2015, you gathered the following information included as part of cash and cash equivalents per books:

Cash on hand

 

P

400,000

Cash in Bank current account

 

1,400,000

Cash in Bank peso savings account

 

8,000,000

Cash in Bank unrestricted dollar deposit

$

400,000

Cash in Bank restricted dollar deposit (for a long term liability and is reflected in the books with the same forex rate as to the unrestricted dollar

80,000

deposit above which is P40) Cash in money market account

P 1,000,000

Treasury bill ,maturing February 28, 2016, acquired December 1, 2015

 

3,200,000

Treasury bond ,maturing February 28, 2016, acquired March 1,2015

2,000,000

Unused Credit Line

8,000,000

Redeemable

preference

shares,

purchased

December

1,

2015,

mandatory

 

1,480,000

redemption date is March 1, 2016 Treasury shares, purchased December 11, 2015, to be reissued on March

200,000

5, 2016 Sinking fund

800,000

Additional information:

Cash on hand includes a P80,000 check payable to PILLS Co. dated January 10, 2016.

During December 2015, checks amounting to P240,000 and P160,000 were drawn against the

current account in payment of accounts payable. The P240,000 check is dated January 15, 2016. The P160,000 check is dated December 31, 2015 but was delivered to the payee only on January 15,

2016.

The Cash in Bank peso savings deposit includes a deposit in escrow in the amount of P1,360,000 and a compensating balance amounting to P1,000,000 which is legally restricted for a short term borrowing.

The Cash in Bank dollar deposit (unrestricted) account includes interest of $8,000, net of tax, directly credited to ALMA MORENO Corporation’s account. The following information pertains to your recomputation procedure as documented in your electronic working paper (BSP rate was

P40.96)

 

Dollar Valuation:

   

Balance per Books PDEX Closing Rate (as required for tax and accounting purposes)

 

$

400,000

P

39.979

Balance per Books in PHP Balance per Trial Balance

 

P15,991,600

 

16,000,000

Difference

P(8,400)

 

M

m Immaterial; passed further procedures

 

50. How much should the cash and cash equivalents be reported in the 2015 FS?

 
 

a.

P21,431,600

b.

P29,431,600

c.

P37,431,600

d.

P29,440,000

 
 

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* * * END OF EXAMINATION * * *

Queen of the Most Holy Rosary, pray for us!