Difficult Round

Auditing
1. What computer-assisted audit technique would an auditor use to identify a
fictitious or terminated employee?
a) Parallel simulation of payroll calculations.
b) Exception testing for payroll deductions.
c) Recalculations of net pay.
d) Tagging and tracing of payroll tax-rate changes.

Solution: B
a) Incorrect. In a parallel simulation, data that were processed by the engagement
client’s system are reprocessed through the auditor’s program to determine if the
output obtained matches the output generated by the client’s system. This
technique might identify problems with the client’s processing but would not
identify a fictitious or terminated employee.
b) Correct. This type of computer-assisted audit technique (CAAT) program
can identify employees who have no deductions. This is important because
fictitious or terminated employees will generally not have any deductions.
c) Incorrect. A CAAT program can recalculate amounts such as gross pay, net pay,
taxes and other deductions, and accumulated or used leave times. These
recalculations can help determine if the payroll program is operating correctly or
if employee files have been altered, but would not identify a fictitious or
terminated employee.
d.) Incorrect. In this type of CAAT program, certain actual transactions are “tagged,”
and as they proceed through the system, a data file is created that traces the
processing through the system and permits an auditor to subsequently review that
processing. This would not, however, identify a fictitious or terminated employee.
Management Advisory Services
2. During 2019, Diana Corp. experienced the following power outages:

Number of
outages per Number of
month months
0 3
1 2
2 4
3 3
12

Each power outage results in an out-of-pocket costs of P400. For P500 per month,
Diana can lease an auxiliary generator to provide power during outages. If Diana
leases an auxiliary generator in 2019 the estimated savings (or additional
expenditures) for 2020 would be?

Answer: Php1,600 or Php1,600 savings

In 2019 Diana incurred the following costs due to power outages:

Number of outages Number of Number of

per month months outages
0 x 3 0
1 x 2 2
2 x 4 8
3 x 3 9
12 19

19 outages x P 400/outage = P7,600

The cost of leasing an auxiliary generator is only P6,000 (12 mos. × P500/mo).
Therefore, Diana would be expected to save P1,600 (P7,600 – P6,000) in 2020 by
leasing the generator.

Taxation
3. Jon Snow Company had the following results of operations for the taxable year
2019:

Gross Income P500,000

Business expenses P200,000
Capital Gain (capital asset held for one (1) year) P 50,000
Capital Loss (capital asset held for 24 months) P100,000

How much is the taxable income of John Snow Company for the year 2019?
Answer: P300,000
Solution:
Gross Income P500,000
Business expenses 200,000
Net Income from operations P300,000
Capital Gain P 50,000
Capital Loss (P100,000)
Net Capital Loss (50,000) -
Taxable Income P300,000
Section 39(C) of the NIRC states that losses from sales or exchanges of capital
assets shall be allowed only to the extent of the gains from such sales or exchanges.
Advanced Financial Accounting and Reporting
4. Caine, Osman, and Roberts formed a partnership on January 1, 2019, agreeing to
distribute profits and losses in the ratio of original capitals. Original investments
were P
= 625,000, P= 250,000 and
P
= 125,000 respectively. Earnings of the firm and drawings by each partner for the
period 2019-2021 follows:

Drawings

Net income Caine Osman Roberts

(loss)
2019 Php440,000 Php150,000 Php78,000 Php52,000

2020 185,000 150,000 78,000 52,000

2021 (105,000) 100,000 52,000 52,000

At the beginning of 2022, Caine and Osman agreed to permit Roberts to

withdraw from the partnership. Since the books for the partnership had never
been audited, the partners agreed to an audit in arriving at the settlement
amount. In withdrawing, Roberts was allowed to take certain furniture and was
charged P = 45,000; the balance of Roberts’
= 15,000, although the book value was P
interest was paid in cash.

The following items were revealed in the course of the audit.

End of 2019 End of 2020 End of 2021
Understatement of accrued Php4,000 Php5,000 Php6,500
expenses
Understatement of accrued 2,500 1,000 1,500
revenue
Overstatement of inventories 15,000 20,000 20,000
Understatement of depreciation
expense on assets still held 1,500 3,500 2,000

How much cash must Roberts received from the partnership?

 Answer: P11,250
Total income (440,000+185,000-105,000) P
= 520,000
Adjustment (-6,500+1,500-20,000-1,500-3,500-2,000) (32,000)
Adjusted total net income 488,000
Multiplied by the P/L percentage 12.50%
Share in net income 61,000
Original investment 125,000
Total withdrawal (52,000 x 3) (156,000)
Share on the impairment of the furniture (45,000- (3,750)
15,000) x 12.50%
Fair value of the furniture (15,000)
Cash received by Roberts from the partnership P
= 11,250

Regulatory Framework for Business Transactions

5. Determine if whether true or false
a. Donations between spouses during marriage are void; this rule applies to
persons “living-in” without the benefit of a legal marriage and persons
guilty of adultery or concubinage.
b. A conditional promise to pay renders an instrument to be non-negotiable
while a negotiable instrument issued, accepted or endorsed when
overdue is considered to be payable on demand.
c. Consignment of goods is essentially an agency contract; insolvency of
the consignor results in the extinguishment of the agency.
d. A pledge must be in a public instrument showing a description of the thing
pledged and the date of the pledge to bind third persons; a real mortgage
must be registered and accompanied by an affidavit of good faith to take
effect against third persons.
Answer: True, True, True, False