January 3, 2019 [COLEGIO SAN AGUSTIN - BACOLOD]

AUDITING AND MANAGERIAL ACCOUNTING

Easy

Auditing

1. Which of the following would be a long-range rather than a short-range

planning topic?

a. Production scheduling.
b. Inventory policy.
c. Product quality.
d. Advertising budget

Answer: C

Solution:
a. Incorrect. This would seldom be a long-range topic.
b. Incorrect. This would rarely be a long-range concern.
c. Correct. This would be a long-range planning topic because it affects the
company’s market position, which entails long-term consideration.
d. Incorrect. This is a certainly a concern, but usually is not for long-range
planning.

Managerial Accounting
2. Zoltrixound company manufactures high quality speakers for desktop and laptop
computers. Last month Zoltrixound suffered a loss of $18,000. The income statement for
the last month is as follows:
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What is the contribution margin ratio (CM ratio) of Zoltrixound Company?

a. 25%
b. 30%
c. 15%
d. 20%
Answer: B

Moderate

Auditing

1. Which of the following tests would best assist the auditor in deciding
whether to investigate this anonymous tip further?

a. Comparison of the current quarter’s maintenance expense with prior-period

activity.

b. Physical inventory testing of replacement parts for existence and valuation.

c. Analysis of repair parts charged to maintenance to review the

reasonableness of the number of items replaced.

d. Review of a test sample of parts invoices for proper authorization and

receipt

Answer: C

Solution:

a. Incorrect. The current quarter’s expense would equal the prior period’s
activity unless the manager just started this fraud. The auditor has no
information on how long this might have been occurring.
b. Incorrect. Physical testing would not locate nonexistent parts that have
already been charged to maintenance.
c. Correct. An analysis of repair parts charged to maintenance would
quantify the excessive number of items and detect that abuse may be
occurring.
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d. Incorrect. Lack of segregation of duties allowed the fraud to occur. The

manager was authorized to process both the purchase and receipt, so the
test would only verify the fraudulent paperwork.

Managerial Accounting

2. Bubblemania has three product lines - A, B, and C.

A B C TOTAL

Total Sales $10,000 9,000 12,000 31,000

Variable costs 4,500 7,000 6,000 17,500
Contribution Margin 5,500 2,000 6,000 13,500
Fixed costs 3,500 6,000 3,000 12,500
Net income 2,000 (4,000) 3,000 1,000

Product line B appears unprofitable, and management is considering

discontinuing the line. How would the discontinuation of Product line B affect
net income?

a. increase by $4,000
b. decrease by $4,000
c. increase by $2,000
d. decrease by $2,000
e. increase by $6,000

Answer: D

Difficult
Auditing
 January 3, 2019 [COLEGIO SAN AGUSTIN - BACOLOD]

1. Internal auditors must determine appropriate and sufficient resources to

achieve engagement objectives. When determining the necessary
resources needed to perform an engagement, which of following should
the auditor consider?

I. The number and experience of the auditing staff.

II. Knowledge, skills and other competencies of the auditing staff.

III. Proper sampling technique.

IV. Probability of errors, irregularities, noncompliance and other

exposures.

a. I and II only.

b. I and IV only.

c. II and III only.

d. III and IV only.

Answer: A

Solution:

I and II. Correct. Internal auditors consider the following when determining the
appropriateness and sufficiency of resources:

• The number and experience level of the internal auditing staff.

• Knowledge, skills, and other competencies of the internal auditing staff when
selecting internal auditors for the engagement.

• Availability of external resources where additional knowledge and

competencies are required.
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• Training needs of internal auditors as each engagement assignment serves as

a basis for meeting the IAA’s developmental needs.

III. Incorrect. Using the proper sampling technique is a means to achieve to the
engagement objective.

IV. Incorrect. The probability of errors, irregularities, noncompliance, and other

exposures should be considered when developing the engagement objectives, not
when determining the appropriateness and sufficiency of resources.

Managerial Accounting

2. The Digital World company sells three products – Product A, Product B

and Product C. The budgeted contribution margin income statement of
the company for the coming month is given below:

Budgeted break-even point = Fixed expenses/CM ratio

= $447,200/0.52

= $860,000

The actual sales data for the month is given below:

 Product A: $320,000
 Product B: $400,000
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 Product C: $280,000
 Total: $320,000 + $400,000 + $280,000 = $1,000,000

Required: Compute the break-even point of Digital World company based on

the actual sales.

Solution:

Actual break-even point = Fixed expenses/CM ratio

= $447,200/0.43

= $1,040,000