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1.0 Notes CASH AND CASH EQUIVALENTS

Accountancy (Philippine Normal University)

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AUDIT IS

a) SYSTEMATIC PROCESS- may step by step process/procedure

b) Objectively obtaining and evaluating evidence- unbiased findings
c) Regarding ASSERTIONS- ichecheck/ ivvalidate yung mga assertions
d) To ascertain the degree of correspondence between assertions and established criteria
 Yung FS ang basis, PFRS, PAS and other applicable basis- yun yung established criteria,
management’s assertion that fs is complete, existing tama ang presentation, match
with applicable standard kung naccomply, vineverify na fairly presented ang fs
e) Communicating the results there of- though AUFIT REPORT icocomunicate sa intended user,
audited f.s

TYPES:

FINANCIAL OPERATIONAL COMPLIANCE NOTES

STATEMENTS AUDIT AUDIT
AUDIT
(external/independent (intern (government
auditor) auditor)
al auditor)
ASSERTIONS FS are FAIRLY Operations are Activities complied
PRESENTED conducted with applicable
EFFICIENTLY AND laws, rules,
EFFECTIVELY regulations,
contracts or mgmt.
policies
SUITABLE CRITERIA GAAP/PFRS/PAS and Objective is set by Applicable,
other financial report the mgmt.. contracts, rules,
framework regulations, laws
etc.
REPORT Audit opinion Report on EE & Degree of
recommendations compliance
to improve
operations

DEMAND FOR FS AUDIT- because there are

ECONOMIC DECISION MAKERS: which are

 PRIMARY USERS AND those who provide capital- financial institutions(banks) and
(investors)stockholders
 OTHER USERS OF FS
PARA TUMAAS ANG CONFIDENCE NILA, DAPAT AUDITED ANG FS, ng mga independent
auditor

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BUSINESS RISK-
INFORMATION RISK-
o Voluminous data- madaming information ang pumapasok sa company.
o Complexity of transactions- computation and accounting treatment, needs the
expertise, kailngan ng audit of fs, to reduce risk in misstatement of information
o Remoteness of information- core infos. Top management lang ang nakakakita,
limited ang makikita ng mga investors
o Conflicts of interest between the provider and users of information- gusto ng info
provider maganda ang labas ng fs, pero ang gusto talaga ng users is yung fairly
presented na fs

ADDITIONAL CONDITIONS CREATING THE NEED FOR FS AUDIT (CERF)

C- onflict of interest between the responsible party (mgmt. or THOSE CHARGED WITH
GOVERNANCE TCWG ) and intended users of the FS

E-XPERTISE- complexity of accounting and AUDITING requires expertise

R-EMOTENESS of users

F-INANCIAL CONSEQUENCE- misleading financial info. Could be substancial economic

consequences for decision makers

REGULATORY REQUIREMENTS
1. GENERAL FINANCIAL REPORTING REQUIREMENTS

2. TAX COMPLIANCE REQUIREMENTS- BIR

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VALUE OF FS AUDIT
1. AUDIT reduces information risk that may lead to lower cost of capital. – mapapababa natin ang
risk for exposure to information, or risk na makapagprovide ng maling info.
2. May be used to deter inefficiency and fraud- fraud risk factors- red flags, indicators for fraud
3. May be used to enhance systems of internal control- security guard, filters the errors in fs, to
prevent material misstatements : mgmt. ang responsible to design, implement and monitor
(DIM)

AUDIT PROCESS
WHY DO WE PERFORM FS/INDEPENDENT AUDIT? We have to verify, examine if fs
are fairly presented in accordance to applicable standard.

GENERAL APPROCH

ASSERTIONS- Fairly presented (PFRS/PAS) ---

o The auditor performs audit procedures--- inquiry, ‘pag may hindi malinaw, inquire.
o Observations
o Inspections- tumitngin ng contracts etc
o Analytical Procedure- analyzing changes from last to present year
o Confirmation-
auditor gather sufficient evidence (SAE)

SOURCE DOCUMENTS:

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CONTRATCS/agreements, ors, and invoices, vouchers, purchase requisitions, tile of

ownership- deed of sales, donations, land title, etc)

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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING THEORY
OTHER SERVICES AND REPORTS
Related PSAs: PSA 910, 920, 930, 800, 810
PSA 910 – Engagements to Review Financial Statements
1. The objective of a review of financial statements is
a. To enable the auditor to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with generally accepted accounting principles in the
Philippines.
b. For the auditor to carry out procedures of an audit nature to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual findings.
c. For the accountant to use accounting expertise, as opposed to auditing expertise, to collect,
classify and summarize financial information.
d. To enable an auditor to state whether, on the basis of procedures which do not provide all
the evidence that would be required in an audit, anything has come to the auditor's
attention that causes the auditor to believe that the financial statements are not prepared, in
all material respects, in accordance with generally accepted accounting principles in the
Philippines (negative assurance).

2. Which statement is incorrect regarding the general principles of a review engagement?

a. The auditor is not required to comply with the “Code of Professional Ethics for Certified
Public Accountants” promulgated by the Board of Accountancy.
b. The auditor should conduct a review in accordance with PSA 910.
c. The auditor should plan and perform the review with an attitude of professional skepticism
recognizing that circumstances may exist which cause the financial statements to be
materially misstated.
d. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to
be able to draw conclusions.

3. Which of the following is required to be performed in an audit but not in review engagement?
a. Complying with the “Code of Professional Ethics for Certified Public Accountants”
promulgated by the Board of Accountancy.
b. Planning the engagement.
c. Agreeing on the terms of engagement.
d. Studying and evaluating internal control structure.

4. Engagement letter for a review of financial statements least likely includes

a. The objective of the service being performed.
b. The fact that the engagement cannot be relied upon to disclose errors, illegal acts or other
irregularities, for example, fraud or defalcations that may exist.
c. A statement that an audit is not being performed and that an audit opinion will not be
expressed.
d. The fact that because of the test nature and other inherent limitations of an audit, together
with the inherent limitations of any accounting and internal control system, there is an
unavoidable risk that even some material misstatement may remain undiscovered.

5. Which statement is incorrect regarding procedures and evidence obtained in a review

engagement?
a. The auditor should apply judgment in determining the specific nature, timing and extent of
review procedures.
b. The auditor should apply the same materiality considerations as would be applied if an
audit opinion on the financial statements were being given.
c. There is a greater risk that misstatements will not be detected in an audit than in a review.
d. The judgment as to what is material is made by reference to the information on which the
auditor is reporting and the needs of those relying on that information, not to the level of
assurance provided.

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6. Which of the following procedures is not included in a review engagement on a nonpublic

entity?
a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. Communicating any material weaknesses discovered during the study and evaluation of
internal accounting control.

7. In a review engagement, the independent accountant’s procedures include:

a. Examining bank reconciliation.
b. Confirming accounts receivable with debtors.
c. Reading the financial statements to consider whether they appear to conform with GAAP.
d. Obtaining a letter of audit inquiry from all attorneys of record.

8. An auditor’s standard report on a review of the financial statements of a nonpublic entity should
state that
a. The auditor does not express an opinion or any form of limited assurance on the financial
statements
b. Nothing has come to the auditor's attention based on the review that causes the auditor to
believe the financial statements are not presented fairly, in all material respects in
accordance with generally accepted accounting principles in the Philippines.
c. The auditor obtained reasonable assurance about whether the financial statements are free
of material misstatement
d. The auditor examined evidence, on a test basis, supporting the amounts and disclosures in
the financial statements

9. Which of the following is not a basic element of a review report?

a. Title of the report c. Introductory paragraph
b. Client’s address d. Auditor’s address

10. The scope paragraph of the review report least likely includes
a. A reference to Philippine Standard on Auditing applicable to review engagements.
b. A statement that a review is limited primarily to inquiries and analytical procedures.
c. A statement that an audit has not been performed, that the procedures undertaken provide
less assurance than an audit and that an audit opinion is not expressed.
d. A statement of the responsibility of the entity's management and the responsibility of the
auditor.

11. If matters have come to the auditor's attention, the auditor should describe those matters that
impair a fair presentation, in all material respects in accordance with GAAP in the Philippines,
including, unless impracticable, a quantification of the possible effect(s) on the financial
statements, and
a. Express a qualification of the negative assurance provided.
b. When the effect of the matter is so material and pervasive to the financial statements that
the auditor concludes that a qualification is not adequate to disclose the misleading or
incomplete nature of the financial statements, give an adverse statement.
c. Not provide any assurance.
d. Either a or b.

12. A review report should be dated as of the

a. Date the report is delivered to the entity reviewed.
b. Date the review is completed.
c. Balance sheet date of the latest period reported on.
d. Date a letter of audit inquiry is received from the entity’s attorney of record.

13. The statement that “nothing came to our attention which would indicate that these statements
are not fairly presented” expresses which if the following?
a. Disclaimer of opinion c. Negative assurance
b. Negative confirmation d. Piecemeal opinion

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PSA 920 – Engagements on Agreed-Upon Procedures

14. Which statement is incorrect regarding agreed-upon procedures?
a. Users of the report assess for themselves the procedures and findings reported by the
auditor and draw their own conclusions from the auditor’s work.
b. The report is restricted to those parties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
c. The auditor should conduct an agreed-upon procedures engagement in accordance with
PSA 920 and the terms of the engagement.
d. Where the auditor is not independent, a statement to that effect need not be made in the
report of factual findings.

15. Which of the following would not be appropriate to a report on an engagement to apply agreed-
upon procedures to specified financial statement items?
a. Indicate the intended distribution of the report.
b. Provide an opinion on the specified elements, accounts, or items.
c. Enumerate the procedures performed.
d. State that the report relates only to the elements, accounts, or items specified.

16. The report on an agreed-upon procedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed. The report of factual findings
should not contain:
a. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures).
b. Identification of the purpose for which the agreed-upon procedures were performed.
c. A description of the auditor’s factual findings including sufficient details of errors and
exceptions found.
d. Statement that the procedures performed constitute an audit and, as such, an opinion is
expressed.

PSA 930 – Engagements to Compile Financial Information

17. Which statement is incorrect regarding compilation engagement?
a. This ordinarily entails reducing detailed data to a manageable and understandable form
without a requirement to test the assertions underlying that information.
b. The procedures employed are designed to enable the accountant to express limited
assurance on the financial information.
c. Users of the compiled financial information derive some benefit as a result of the
accountant's involvement because the service has been performed with professional
competence and due care.
d. In all circumstances when an accountant's name is associated with financial information
compiled by the accountant, the accountant should issue a report.

18. A CPA is not required to comply with the “Code of Professional Ethics for Certified Public
Accountants” promulgated by the Board of Accountancy when performing
a. Review. c. Compilation.
b. Agreed-upon procedures. d. None of the above.

19. An accountant who is not independent may issue a

a. Compilation report c. Comfort letter
b. Review report d. Qualified opinion

20. Indicate whether the following procedures performed in an audit engagement are also required
when performing related services.
a b c d
• Agreeing on the terms of engagement Yes Yes Yes No
• Engagement planning Yes Yes Yes No
• Documentation Yes Yes No No
• Issuance of report Yes No No No

21. When compiling financial information, the accountant ordinarily is required to

a. Obtain a general knowledge of the business and operations of the entity.
b. Make any inquiries of management to assess the reliability and completeness of the
information provided.

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c. Verify any matters.

d. Verify any explanations.

22. Which statement is incorrect regarding the procedures performed in a compilation

engagement?
a. If the accountant becomes aware that information supplied by management is incorrect,
incomplete, or otherwise unsatisfactory, the accountant should consider performing
appropriate procedures and request management to provide additional information.
b. The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements.
c. The generally accepted accounting principles in the Philippines and any known departures
therefrom should be disclosed within the financial information, and their effects should be
quantified.
d. The accountant should obtain an acknowledgment from management of its responsibility for
the appropriate presentation of the financial information and of its approval of the financial
information.

23. If the accountant becomes aware of material misstatements, the accountant should try to agree
appropriate amendments with the entity. If such amendments are not made and the financial
information is considered to be misleading, the accountant should
a. Do nothing.
b. Withdraw from the engagement.
c. Issue a qualified or adverse opinion.
d. Issue a negative assurance.

24. Reports on compilation engagements should contain the following, except:

a. A statement that the engagement was performed in accordance with the PSA applicable to
compilation engagements.
b. Identification of the financial information noting that it is based on information provided by
management.
c. A statement that management is responsible for the financial information compiled by the
accountant.
d. A statement that the accountant does not express an opinion but expresses only limited
assurance on the financial statements.

25. On each page of the financial information or on the front of the complete set of financial
statements, the financial information compiled by the accountant should contain a reference
such as
a. "Unaudited"
b. "Compiled without Audit or Review"
c. "Refer to Compilation Report"
d. Any of the above.

26. An accountant’s compilation report should be dated as of the date of

a. Completion of fieldwork.
b. Completion of the engagement.
c. Transmittal of the compilation report.
d. The latest subsequent event referred to in the notes to the financial statements.

PSA 800 – The Auditor’s Report on Special Purpose Audit Engagements

27. The following are special purpose audit engagements, except
a. Financial statements prepared in accordance with a comprehensive basis of accounting
other than generally accepted accounting principles in the Philippines.
b. Specified accounts, elements of accounts, or items in a financial statement.
c. Compliance with contractual agreements.
d. Compiled financial statements.

28. Which statement is incorrect regarding special purpose audit engagements?

a. Before undertaking a special purpose audit engagement, the auditor should ensure there is
agreement with the client as to the exact nature of the engagement and the form and
content of the report to be issued.
b. To avoid the possibility of the auditor’s report being used for purposes for which it was not
intended, the auditor may wish to indicate in the report the purpose for which the report is
prepared and any restrictions on its distribution and use.

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c. When requested to report in a prescribed format, the auditor should consider the substance
and wording of the prescribed report.
d. The auditor need not consider whether any significant interpretations of an agreement on
which the financial information is based are clearly disclosed in the financial information.

29. A comprehensive basis of accounting comprises a set of criteria used in preparing financial
statements which applies to all material items and which has substantial support. Other
comprehensive financial reporting frameworks may include the following, except
a. A conglomeration of accounting conventions devised to suit individual preference.
b. That used by an entity to prepare its income tax return.
c. The cash receipts and disbursements basis of accounting.
d. The financial reporting provisions of a government regulatory agency.

30. The CPA is asked to audit financial statements prepared on a modified cash basis. This is
acceptable provided the CPA
a. Converts the financial statement to an accrual basis before rendering an audit report.
b. Qualifies the audit opinion for a departure from GAAP.
c. Issues an adverse opinion.
d. States clearly in the audit report that fairness was evaluated within the framework of the
other basis rather than GAAP.

31. Which statement is correct regarding report on a component of financial statements?

a. This type of engagement may be undertaken as a separate engagement or in conjunction
with an audit of the entity’s financial statements.
b. In determining the scope of the engagement, the auditor need not consider those financial
statement items that are interrelated and which could materially affect the information on
which the audit opinion is to be expressed.
c. The auditor’s examination will ordinarily be less extensive than if the same component were
to be audited in connection with a report on the entire financial statements.
d. When an adverse opinion or disclaimer of opinion on the entire financial statements has
been expressed, the auditor may report on components of the financial statements even if
those components are so extensive as to constitute a major portion of the financial
statements.

32. Which statement is incorrect regarding report on compliance with contractual agreements?
a. The auditor cannot be requested to report on an entity’s compliance with certain aspects of
contractual agreements, such as bond indentures or loan agreements.
b. Engagements to express an opinion as to an entity’s compliance with contractual
agreements should be undertaken only when the overall aspects of compliance relate to
accounting and financial matters within the scope of the auditor’s professional competence.
c. When there are particular matters forming part of the engagement that are outside the
auditor’s expertise, the auditor would consider using the work of an expert.
d. The report should state whether, in the auditor’s opinion, the entity has complied with the
particular provisions of the agreement.

33. Which statement is incorrect regarding report on summarized financial statements?

a. Unless the auditor has expressed an audit opinion on the financial statements from which
the summarized financial statements were derived, the auditor should not report on
summarized financial statements.
b. Summarized financial statements are presented in considerably less detail than annual
audited financial statements.
c. Summarized financial statements need to be appropriately titled to identify the audited
financial statements from which they have been derived.
d. Summarized financial statements contain all the information required by the financial
reporting framework used for the annual audited financial statements.

34. The auditor’s report on summarized financial statements least likely include
a. An identification of the audited financial statements from which the summarized financial
statements were derived.
b. A reference to the date of the audit report on the unabridged financial statements and the
type of opinion given in that report.
c. An opinion as to whether the information in the summarized financial statements is
presented fairly, in all material respects.

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d. A statement which indicates that for a better understanding of an entity’s financial

performance and position and of the scope of the audit performed, the summarized
financial statements should be read in conjunction with the unabridged financial statements
and the audit report thereon.

PSA 810 – The Examination of Prospective Financial Information

35. In an engagement to examine prospective financial information, the auditor should obtain
sufficient appropriate evidence as to whether:
I. Management’s best-estimate assumptions on which the prospective financial information is
based are not unreasonable and, in the case of hypothetical assumptions, such
assumptions are consistent with the purpose of the information.
II. The prospective financial information is properly prepared on the basis of the assumptions.
III. The prospective financial information is properly presented and all material assumptions are
adequately disclosed, including a clear indication as to whether they are best-estimate
assumptions or hypothetical assumptions.
IV. The prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.
a. I, II, III and IV b. I, II and III c. I and II d. I, II and IV

36. Forecast means

a. Financial information based on assumptions about events that may occur in the future and
possible actions by an entity.
b. Prospective financial information prepared on the basis of assumptions as to future events
which management expects to take place and the actions management expects to take as
of the date the information is prepared (best-estimate assumptions).
c. Prospective financial information prepared on the basis of hypothetical assumptions about
future events and management actions which are not necessarily expected to take place.
d. Prospective financial information prepared on the basis of a mixture of best-estimate and
hypothetical assumptions.

37. Prospective financial information can include financial statements or one or more elements of
financial statements and may be prepared for distribution to third parties in
a. A prospectus to provide potential investors with information about future expectations.
b. An annual report to provide information to shareholders, regulatory bodies and other
interested parties.
c. A document for the information of lenders which may include, for example, cash flow
forecasts.
d. Any of the above.

38. An auditor should not issue a report on

a. The achievability of forecasts c. Management performance
b. Internal control d. Quarterly financial information

39. Which statement is incorrect regarding examination of prospective financial information?

a. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
b. The auditor and the client should agree on the terms of the engagement.
c. The auditor should obtain a sufficient level of knowledge of the business to be able to
evaluate whether all significant assumptions required for the preparation of the prospective
financial information have been identified.
d. The auditor need not obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and management’s acceptance of its responsibility for the
prospective financial information.

40. When the auditor believes that the presentation and disclosure of the prospective financial
information is not adequate, the auditor should
a. Express a qualified or adverse opinion in the report on the prospective financial information.
b. Withdraw from the engagement.
c. Disclaim the opinion in the report on the prospective financial information.
d. Either a or b.

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Auditing Quiz - Cash and Cash Equivalents

BS Accountancy (Southern Luzon State University)

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1. Cash receipts should be deposited on the day of receipt of the following business day. Select the
most appropriate audit procedure to determine that cash is promptly deposited.
a. Review functions of cash receiving and disbursing for proper separation of duties
b. Review cash register tapes prepared for each sale
c. Review the functions of cash handling and maintaining accounting records for proper
separation of duties
d. Compare the daily cash receipts totals with the bank deposits
2. Which of the following sets of information does an auditor usually confirm in one form?
a. Cash in bank and collateral for loans
b. Accounts payable and purchase commitments
c. Accounts receivable and accrued interest receivable
d. Inventory on consignment and contingent liabilities
3. The primary purpose of sending standard confirmation request to financial institutions with which
the client has done business during the year is to
a. Corroborate information regarding deposit and loan balances
b. Provide the data necessary to prepare a proof of cash
c. Detect kiting activities that may otherwise not be discovered
d. Request information about contingent liabilities and secured transaction
4. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After
the client’s treasurer has signed the request, it was mailed by the assistant treasurer. What is the
major flaw in this audit procedure?
a. The CPA did not sign the confirmation request before it was mailed
b. Sending the request was meaningless because the account was closed before the year-end
c. The confirmation request was signed by the treasurer
d. The request was mailed by the assistant treasurer
5. Kiting is
a. Making the financial statements indicate a more favourable financial position by giving effect
to transactions in a period other than in which they actually occurred
b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the
accounting period a check drawn on one bank account in another bank account without making
the necessary deduction in the balance of the first bank
c. An irregularity that conceals cash shortages by a delay in recording cash collections, retaining a
customer’s payment on credit sales and covering up the shortage with subsequent cash receipts
d. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts
6. The least crucial element of control over cash is
a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.
7. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and
disbursement procedures. Which of the following deficiencies alone should cause you the least
concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails toestablish bonafide names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.

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8. Documentary evidence is one of the principal types of corroborating information used by an

auditor to substantiate an opinion. Which one of the following examples of documentary evidence
would be the most reliable?
a. Time tickets.
b. Material requisition slips.
c. Copies of sales invoices.
d. Bank statements.
9. In verifying a November 30 sales cutoff date, an auditor would be most concerned with
comparing records of
a. November cash receipts with December bank deposits.
b. November purchases with December shipments.
c. November accounts receivable with November sales.
d. November sales with November shipping documents.
10. A proof of cash used by an auditor
a. Proves that the client's year-end balance of cash is fairly stated. b. Confirms that the client has
properly separated the custody function from the recording function with respect to cash. c.
Validates that the client's bank did not make an error during the period being examined. d.
Determines if there were any unauthorized disbursements or unrecorded deposits for the given
period.

11. Sertipikado, CPA, is engaged in the audit of the financial statements of Alpha Company, a
manufacturing entity with branch offices in many widely separated cities. Sertipikado was not
able to count the substantial undeposited cash receipts on the last day of the fiscal year at all
branch offices. As an alternative procedure, Sertipikado verified all the reported undeposited cash
collections in the cut-off bank statements and was satisfied as to cut-off of cash receipts. How
should Sertipikado prepare his audit report?
a. Issue an unqualified opinion with an emphasis of matter paragraph that refers to the use of
alternative audit procedure.
b. Issue a qualified opinion due to scope limitation.
c. Issue an unqualified opinion on income statement and a qualified opinion on the balance sheet.
d. Issue a standard unqualified opinion.
12. Which of the following would best protect a company that wishes to prevent lapping?
a. Lighting all the premises and installing CCTV cameras to prevent employees from performing
lapping.
b. Segregating duties so that no employee has access both to checks from customers and to
currency from daily cash receipts
c. Having customers send payments directly to the company's bank
d. Requesting that customers checks be made payable to the company and be addressed to the
treasurer

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1. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new
client?
A. The client’s probability of achieving an unqualified opinion.
B. The client’s financial ability.
C. The client’s relations with its previous CPA firm.
D. The client’s standing in the business community.
2. After accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:
A. The predecessor’s evaluation of matters of continuing accounting significance.
B. Disagreements which the predecessor had with the client concerning auditing procedures and
accounting principles.
C. The client’s ability to pay the fee for this engagement.
D. The predecessor’s assessments of inherent risk and judgments about materiality.
3. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in a(n):
A. Client’s representation letter C. Audit engagement letter.
B. Independent auditor’s report D. Management letter
4. Which of the following is not a valid reason why an auditor sends to his client an engagement letter?
A. Avoid misunderstanding with respect to the engagement
B. Confirms the auditor’s appointment
C. Discloses the objective and scope of the audit
D. Assures CPA’s compliance to PSAs
5. The secondary purpose of the engagement letter is to:
A. Remind management that the primary responsibility for the financial statements rests with
management.
B. Satisfy the requirements of the CPA’s liability insurance policy.
C. Provide a written record of the agreement with the client as to the services to be provided.
D. Provide a starting point for the auditor’s preparation of the preliminary audit program.
6. S1 The engagement letter will include identification of significant dates throughout the engagement.
S2 The engagement letter will inform the client about the audit procedures to be performed.
A. True, true B. False, false C. True, false D. False, true

7. Which of the following procedures is performed primarily during audit planning?

A. Risk assessment procedures
B. Tests of controls
C. Substantive tests
D. All of the above are performed primarily during audit planning
8. Which of the following is not a risk assessment procedure?
A. Inquiries of management and others within the entity
B. Analytical procedures
C. External confirmation with customers
D. Observation and inspection
9. S1 Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
S2 An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the financial statements.
A. True, true B. False, false C. True, false D. False, true

10. S1 Analytical procedures are required to be used in planning a financial statement audit.
S2 Analytical procedures are required to be used all throughout the audit.
A. True, true B. False, false C. True, false D. False, true

11. S1 In a financial statement audit, audit risk represents the probability that internal controls fail and the
failure is not detected by the auditor’s procedures.
S2 Audit risk may be eliminated by 100% testing of the items in the population.
A. True, true B. False, false C. True, false D. False, true

12. In a financial statement audit, detection risk represents:

A. The susceptibility of an account balance to error that could be material.
B. The risk that error could occur and not be prevented or detected by the internal control structure of
the client.
C. The risk that the auditor fails to modify materially misstated financial statements.
D. The risk that error could occur and not be detected by the auditor’s procedures.
13. The following statements describe components of internal control. Which one describes risk assessment
process?
A. This includes the governance and management functions and the attitudes, awareness, and actions
of those charged with governance and management concerning the entity’s internal control and its
importance in the entity.
B. The process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof.
C. The classes of transactions in the entity’s operations that are significant to the financial statements.
D. The policies and procedures that help ensure that management directives are carried out.
14. S1 The auditor assesses detection risk because it affects the level of control risk that the auditor may
accept.
S2 The auditor assesses control risk because it affects the level of detection risk that the auditor may
accept.
A. True, true B. False, false C. True, false D. False, true

15. Which of the following would not be a method used to conduct tests of controls?
A. Inquiry and observation. C. Reperformance.
B. Inspection. D. Analytical procedures

16. As the auditor plans to rely more on the client’s internal control structure,
A. Substantive tests should increase. C. Substantive tests should decrease.
B. Tests of controls should increase. D. Tests of controls should decrease.
17. S1 Audit evidence comprises all the information available to the auditor during an audit engagement.
S2 Accounting records, on their own, constitute sufficient appropriate evidential matter.
A. True, true B. False, false C. True, false D. False, true

18. Which of the following is an example of the auditor’s direct knowledge?

I. Inspection
II. Observation
III. Computation
A. I only B. I and III C. II and III D. I, II and III

19. S1 An auditor should recognize that the application of auditing procedures may produce evidential matter
indicating the possibility of errors and irregularities and therefore should not depend on internal
accounting control features that are designed to prevent or detect errors or irregularities.
S2 Inquiries of the client’s internal audit staff, held in private, constitute one of the most reliable sources
of evidence in testing the rights and obligations assertion related to land and buildings.
A. True, true B. False, false C. True, false D. False, true

20. Which of the following is an example of fraud?

A. Client personnel make mistakes in gathering or processing accounting data from which financial
statements are prepared.
B. Client personnel alter accounting records from which financial statements are prepared.
C. Client personnel overlook or misinterpret facts, causing accounting estimates to be incorrect.
D. Client personnel make mistakes in the application of accounting principles.

21. Which of the following situations are applicable to fraud as well as error?
A. Mistakes in gathering or processing accounting data
B. Suppression of the recording of accounting transactions
C. Misinterpretation of facts, causing the classification of leases to be incorrect
D. Misapplication of accounting policies

22. Which of the following best describes a portion of the auditor’s responsibility regarding illegal acts by
clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect that illegal acts have been performed, they should conduct a legal audit of
the company
D. The auditor’s responsibility for the detection of all illegal acts is the same as their responsibility
regarding material errors and irregularities.
23. Which of the following is not generally included in the working papers file?
A. Documentation of the auditor’s understanding of the accounting and internal control systems.
B. Copy of the internal auditor’s audit program.
C. Analyses of significant ratios and trends.
D. An indication as to who performed the audit procedures and when they were performed.
24. The standard (unmodified) audit report includes the following:
I. Emphasis of a matter paragraph
II. Unqualified opinion
A. I only B. II only C. I and II D. Neither I nor II

25. When restrictions that materially limit the scope of the audit are imposed by the client, the auditor
generally should issue which of the following opinions?
A. “Except for” C. Unqualified
B. Adverse D. Disclaimer

26. An audit report should be dated no earlier than:

A. Date the report is delivered to the entity audited.
B. Date the auditee has obtained sufficient, appropriate audit evidence.
C. Date of the completion of the audit.
D. Date a letter of audit inquiry is received from the entity’s attorney of record.

27. Which of the following statements indicates an adverse opinion?

A. “The financial statements do not present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with GAAP.”
B. “The auditor does not express an opinion on the financial statements.”
C. “The financial statements present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with GAAP.”
D. “Except for the effects of a matter, the financial statements present fairly in all material respects the
financial position, results of operations, and cash flows in conformity with GAAP.”

28. In which of the following paragraphs can you find the phrase “Philippine Financial Reporting Standards”?
I. Opening paragraph
II. Management responsibility paragraph
III. Auditor’s responsibility paragraph
IV. Opinion paragraph
A. I only B. II and III C. II and IV D. II, III and IV

29. This means the application of audit procedures to less than 100% of items within an account balance or
class of transactions, where all sampling units have a chance of being selected for testing.
A. Audit sampling C. Haphazard testing
B. Selecting specific items D. Statistical sampling
30. A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a
A. Random sample. C. Judgment sample.
B. Statistical sample. D. Representative sample.

31. S1 The documentary evidence which physically represents the sampling units in a given population, is
known as sampling form.
S2 Error that arises from an isolated event that has not recurred other than on specifically identifiable
occasions and is therefore not representative of errors in the population is known as projected error.
A. True, true B. False, false C. True, false D. False, true

32. S1 An advantage of statistical sampling over non-statistical sampling methods in tests of controls is that
the statistical sampling methods provide an objective basis for qualitatively evaluating sampling risk.
S2 Statistical sampling methods do not allow the auditor to eliminate the need to use judgment in
determining the appropriate sample size.
A. True, true B. False, false C. True, false D. False, true

33. One of the causes of sampling error is

A. The use of inappropriate or ineffective audit procedures.
B. Fatigue and lack of attention to detail
C. Failure to draw a representative sample.
D. The use of attributes sampling instead of variables sampling.

34. Which of the following comments best illustrates the concept of non-sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor uses attributes sampling instead of variables sampling.
D. The documents related to the chosen sample may not be available for inspection.
35. At times a sample may indicate that the auditor’s assessed level of control risk for a given control is
reasonable when, in fact, the true compliance rate does not justify the “less than high” level. This situation
illustrates the risk of
 A. Assessing control risk too low. C. Incorrect rejection.
B. Assessing control risk too high. D. Incorrect acceptance.

36. The consequence of assessing control risk too high relates to the
a. Efficiency of the audit. c. Preliminary estimates of materiality levels.
b. Effectiveness of the audit. d. Allowable risk of tolerable error.

37. The likelihood of assessing control risk too low is the risk that the sample selected to test controls:
A. Does not support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure justifies such an assessment.
B. Contains misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances or transactions classes.
C. Contains proportionately fewer deviations from prescribed internal control structure policies or
procedures than exist in the balance or class as a whole.
D. Supports the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure does not justify such an assessment.

38. While performing a substantive test of details during an audit, the auditor determined that the sample
results supported the conclusion that the recorded account balance was materially misstated. It was, in
fact, not materially misstated. This situation illustrates the risk of
A. Incorrect rejection. C. Assessing control risk too low.
B. Incorrect acceptance. D. Assessing control risk too high.

39. A sampling method that is useful when testing controls is:

A. Non-statistical sampling. C. Discovery sampling.
B. Attribute estimation sampling. D. Stratified random sampling.

40. If the auditor is concerned that a population may contain exceptions, the determination of a sample size
sufficient to include at least one such exception is a characteristic
A. Random sampling C. PPS Sampling
B. Discovery sampling D. Variable sampling

41. S1 Statistical sampling may be applied to test controls when a client’s control procedures leave an audit
trail as evidence of compliance.
S2 For purposes of audit sampling in tests of controls, errors refer to misstatements.
A. True, true B. False, false C. True, false D. False, true

42. A decrease in the expected population deviation rate will cause the sample size to:
A. Increase C. Remain unchanged
B. Decrease D. Cannot be determined.
43. This is the deviation rate that an auditor will permit in the population and would still be willing to reduce
the assessed level of control risk:
A. Population deviation rate. C. Sample deviation rate.
B. Tolerable misstatement. D. Tolerable deviation rate.

44. Which of the following sampling methods is used to estimate a numerical measurement of a population,
such as a peso value?
A. Attribute sampling. C. Variables sampling.
B. Stop-or-go sampling. D. Random-number sampling.

45. When selecting samples, a decrease in the tolerable misstatement will cause the sample size to:
A. Increase C. Remain unchanged
B. Decrease D. Cannot be determined.

46. This is the misstatement that the auditor finds in the sample, adjusted to estimate the misstatement in the
population.
A. Tolerable misstatement. C. Projected misstatement.
B. Sample misstatement. D. Anticipated misstatement.

47. When performing a test of a control with respect to control over cash receipts, an auditor may use a
systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of
this type of sampling is that the items in the population
A. Must be systematically replaced in the population after sampling.
B. May systematically occur more than once in the sample.
C. Must be recorded in a systematic pattern before the sample can be drawn.
D. May occur in a systematic pattern, thus destroying the sample randomness.
48. S1 A method of sampling in which all items in the population are divided into two or more sub-population
is known as systematic sampling.
S2 One of the disadvantages of haphazard sampling is the risk of conscious bias in the selection of
samples.
A. True, true B. False, false C. True, false D. False, true

49. According to PSA 560, “subsequent events” refer to:

A. Events occurring between the period end and the date of the auditor’s report
B. Facts discovered after the date of the auditor’s report.
C. Events occurring between the week immediately before the end of the period and the date of the
auditor’s report.
D. Events occurring between the period end and the date of the auditor’s report and facts discovered
after the date of the auditor’s report.

50. Which of the following procedures should an auditor most likely perform regarding subsequent events?
A. Comparing the financial statements being reported on with those of the prior period.
B. Investigating changes in accounting department personnel occurring after the date of the financial
statements.
C. Confirming a sample of material accounts receivable established after the date of the financial
statements.
D. Inquiring as to whether any unusual adjustments were made after the date of the financial
statements

51. After the date of the audit report but before the financial statements are issued, the auditor becomes
aware of a material subsequent event which requires adjustment in the financial statements. If
management does not amend the financial statements, the audit opinion to be issued would be:
A. Unqualified opinion with explanation C. Adverse opinion
B. Qualified opinion or adverse opinion D. Qualified opinion

52. When obtaining evidence regarding litigation against a client, the CPA would be least interested in
determining:
A. The period in which the underlying causes of litigation occurred.
B. An estimate of when the matter will be resolved.
C. An estimate of the potential loss.
D. The probability of an unfavorable outcome.

53. The secondary source of information to be reported about litigation, claims, and assessments is the
A. Client’s lawyer C. Client’s management
B. Court records D. Independent auditor

54. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims and
assessments most likely would cause the auditor to request clarification?
A. “I believe that the company will be able to defend this action successfully.”
B. “The possible liability to the company is nominal in amount.”
C. “This case against the company is without merit!”
D. “The action can be settled for less than the damages claimed.”

55. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the
auditor should:
A. Honor the confidentiality of the client-lawyer relationship.
B. Seek to obtain the corroborating information from management.
C. Consider the refusal to be tantamount to a scope limitation.
D. Disclose this fact in the notes to the financial statements.

56. Audit inquiries with the client’s legal counsel should cover cases up to:
A. The balance sheet date C. The date when the letter was written
B. The date of the audit report D. Cannot be determined

57. The primary objective of analytical procedures used in the final review of an audit is to
A. Obtain evidence from details tested to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in determining the reasonableness of the financial statements.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.

58. The responsibility for the identification and disclosure of related parties and related party transactions rests
with the:
A. External auditor. C. Internal audit department head
B. Entity management D. Controller
59. Which of the following events most likely indicates the existence of related parties?
A. Discussing terms of merger with a company that is a major competitor.
B. Making a loan with scheduled terms for repayment
C. Borrowing a large sum of money at a very low interest rate.
D. Selling real estate at a price that differs significantly from its carrying value.

60. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s
relationship to the total entity because:
A. This may permit the audit of intercompany account balances to be performed as of concurrent
dates.
B. The business structure may be deliberately designed to obscure related party transactions.
C. This may reveal whether particular transactions would have taken place if the parties had not been
related.
D. Intercompany transactions may have been consummated on terms equivalent to arms’ length
transactions.

61. When auditing related-party transactions, an auditor places primary emphasis on

A. Eliminating the effects of related party transactions.
B. Substance over form of the transactions, and disclosure of the related-party transactions.
C. Testing the existence of the related parties.
D. Determining the accuracy and classification of the related-party transactions.

62. The responsibility to evaluate the cliednt’s assessment of an entity’s ability to continue as a going concern
rests with:
A. The auditor C. The BOA
B. The entity’s management D. The financial statement users

63. Which of the following conditions or events most likely would cause an auditor to have substantial doubt
about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are positive.
B. Share dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Interest payable in arrears for several months.

64. Travis, CPA, believes there is substantial doubt about the ability of Alice Co. to continue as a going concern
for a reasonable period of time. In evaluating Alice Co.’s plans for dealing with the adverse effects of
future conditions and events, Travis most likely would consider, as a mitigating factor, Alice Co.’s plans to:
A. Postpone or cancel research and development projects related to future products
B. Accumulate treasury stock at prices favorable to Alice Co.’s historic price range
C. Purchase equipment and production facilities currently being leased
D. Negotiate increases in required dividends being paid on preference shares

65. The auditor should obtain evidence of management’s acknowledgment of responsibility for
I. The fair presentation of the financial statements in accordance with PSAs
II. Approval of the financial statements
A. I only B. II only C. Both I and II D. Neither I nor II

66. Which of the following documentation is required for an audit in accordance with Philippine Standards on
Auditing (PSAs)?
A. An internal control questionnaire. C. A client engagement letter.
B. A planning memorandum or checklist. D. A management representation letter.
67. S1 Management representation letters are substitutes for substantive test procedures.
S2 All members of the client’s management are to sign the management representation letter.
A. True, true B. False, false C. True, false D. False, true

68. Written client representation letters are normally signed by the:

A. president and the chairperson of the board.
B. treasurer and the internal auditor.
C. chief executive officer and the chief financial officer.
D. corporate counsel and the audit committee chairperson.

69. Management representation letters should be dated as of the date of the:

A. Statement of financial position. C. Completion of the audit
B. Latest interim financial statements. D. Latest related party transaction.
70. Management’s refusal to furnish a written representation letter on a matter, which the auditor considers
essential, may lead the auditor to choose between the issuance of:
A. Unqualified or qualified opinion C. Adverse opinion or disclaimer of opinion
B. Qualified opinion or Adverse opinion D. Qualified opinion or disclaimer of opinion

71. Which of the following statements is incorrect?

a. PSA 100 states that when an expert is used in the collection and evaluation of evidence, the
practitioner and the expert should on a combined basis, possess sufficient knowledge of the
subject matter and have adequate proficiency in the subject matter for the practitioner to
determine that sufficient, appropriate evidence has been obtained. (x)
b. Compilation engagements ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that information.
c. According to PSA 200, Objective and General Principles Governing an Audit of Financial
Statements, the professional responsibilities of an auditor include independence, integrity,
objectivity, confidentiality, professional behavior, technical standards, and professional
competence and due care.
d. PSA 210, Terms of Audit Engagements, applies to audits, reviews, and other related services.

72. Assurance services are independent professional services that

a. Include a written communication that expresses a conclusions
b. Improve the quality of information, or its context for decision makers. (x)
c. Include audit services, attest services, and consulting services.
d. Involve the examination of the credibility of a written assertion that is the responsibility of
another party.

73. Which of the following services would be most likely to be structured as an attest engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data-base system for the revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements of
specified laws. (x)
d. The compilation of client’s forecast information.

74. Which of the following statements is incorrect?

a. Attendance consists of being present during all or part of a process being performed by
others.
b. Audit evidence will comprise source documents and accounting records underlying financial
statements and corroborating information from other sources.
c. The characteristics for determining whether criteria are suitable are relevance, reliability,
neutrality and consistency. (x)
d. Governance describes the role of persons entrusted with the supervision, control and direction
of an entity.

75. The Constitution of the Philippines requires this Office to “keep the general accounts of the
Government and for such period as may be provided by law, preserve the vouchers pertaining
thereto”
a. National Accounting Office
b. Ministry of Finance
c. Auditing units to each bureau or office.
d. Commission on Audit. (x)

76. Which of the following is not required by PSA 200, which states that professional competence and
due care is one of the ethical responsibilities of an auditor in an audit engagement?
a. observance of the relevant Philippine Standards on Auditing
b. critical review of the audit work performed at every level of supervision
c. degree of skill commonly possessed by others in the profession
d. responsibility for losses because of errors of judgment (x)

77. The term testing alludes to the concept of

a. A guarantee
b. A certificate
c. Accuracy
d. Sampling (x)

78. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for
all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
 d. Professional skepticism. (x)

79. Philippine Standards on Auditing (PSAs)

a. must be followed on every audit, but the auditor may choose an alternative course of action if
it is justifiable (x)
b. must be followed only on those audits which must be submitted to the SEC
c. are ideal standards that are rarely, if ever, attained
d. must be followed by CPAs who are members of the PICPA, but they are optional for CPAs
who are not members of the PICPA

80. All of the following organizations are represented in both the Financial Reporting Standards Council
(FRSC) and the Auditing and Assurance Standards Council (AASC), except:
a. Professional Regulatory Board of Accountancy
b. Bangko Sentral ng Pilipinas
c. Bureau of Internal Revenue (x)
d. Commission on Audit

81. PSAs include standards on reporting. Which of the following is not one of the focus of PSA 700, the
Auditor’s Report on Financial Statements?
a. adequacy of informative disclosures
b. circumstances when GAAP are not consistently followed
c. whether statements were prepared in accordance with GAAP
d. sufficient appropriate evidence is to be obtained to support the audit conclusions (x)

82. Because external auditors are paid fees by their clients, external auditors
a. are absolutely independent and may conduct audits
b. may be sufficiently independent to conduct audits (x)
c. are never considered to be independent
d. must receive approval of the SEC before conducting audits

83. Which of the following situations best illustrates the application of professional skepticism?
a. G, CPA, is engaged in discussions with J, the client’s controller. G obtains several oral
representations from J, which the former readily accepts without further work or support from
other audit procedures.
b. G, CPA has decided to continue with the audit of FLS Company. Throughout the course of
the audit, G does not believe any of the representations made by J, controller.
c. G, CPA, is discussing several audit issues with J, a member of top management. Throughout
the meeting with J, G neither assumes that J is dishonest, nor assumes unquestioned honesty
in J’s oral representations. (x)
d. G, CPA is engaged in discussions with J, the client’s controller, regarding several audit issues.
Throughout the meeting with J, J neither assumes that G is dishonest, nor assumes
unquestioned honesty in G’s oral representations.

84. Objectivity refers to a practitioner’s ability:

a. To remain impartial. (x)
b. To identify assertions that are appropriate.
c. To be unyielding in all disputes.
d. To choose independently between accounting principles and auditing standards.
85. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of prospective client’s industry and business.
b. The prospective client’s signature to the engagement letter.
c. A preliminary understanding of the prospective client’s control environment.
d. The prospective client’s consent to make inquiries of the predecessor auditor, if any. (x)

86. In financial statement audit, audit risk represents the probability that
a. internal control fails and the failure is not detected by the auditor’s procedures
b. the auditor unknowingly fails to modify an opinion on materiality misstated financial
statements (x)
c. inherent and control risk cause errors that could be material to the financial statements
d. the auditor is not retained to conduct financial statement audit in the succeeding year

87. If the auditor concludes that there is reasonable justification to change the engagement and if the
audit work performed complies with the PSAs applicable to the changed engagement, the report
issued would be that appropriate for:
a. The original engagement, without reference to the original engagement.
b. The revised terms of engagement, without reference to the original engagement. (x)
c. The revised terms of engagement, with reference to the original engagement.
d. The original engagement, with reference to the revised engagement.

88. Which of the following services provides the highest level of assurance to third parties about a
company’s financial statements?
a. Audit (x)
b. Review
c. Compilation
d. Write-up work

89. When CPA firms do an audit of historical financial statements, part of the audit usually consists of
identifying operational problems and making recommendations they may benefit the audit client. The
recommendations can be made orally but they are typically made by use of a
a. Letter of representation
b. Engagement letter.
c. Management letter. (x)
d. Client letter.

90. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presences often have been observed in circumstances where frauds have
occurred. (x)
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified during an audit.

91. The most difficult type of misstatement to detect is fraud based on

a. The over-recording of transactions.
b. The non-recording of transactions. (x)
c. Recorded transactions in subsidiaries.
d. Related party receivables.

92. Which of the following conditions identified during fieldwork of an audit is most likely to affect the
auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end.
b. Computer generated documents.
c. Missing documents. (x)
d. Year-end adjusting journal entries.

93. Which of the following most accurately summarizes what is meant by the term “material
misstatement?”
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material fraud.
c. Material error, material fraud, and certain illegal acts. (x)
d. Material error and material illegal acts.

94. Which of the following is most likely to be a response to the auditor’s assessment that the risk of
material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory of certain locations on an unannounced basis. (x)
b. Perform analytical procedures rather than taking test counts.
c. Request that the inventories be counted prior to year-end.
 d. Request that inventory counts at the various locations be counted on different dates so as to
allow the same auditor to be present at every count.

95. Which of the following is not a component of audit planning?

a. Observing the client’s annual physical inventory-taking and making test counts of selected
items. (x)
b. Making arrangements with the client concerning the timing of audit fieldwork and use of the
client’s staff in completing certain phases of the examination.
c. Obtaining an understanding of the entity and its environment, including its internal control.
d. Developing audit programs.

96. In planning an examination, the auditor would consider all of the following matters, except
a. Anticipated reliance on internal controls
b. Preliminary judgment about materiality levels for audit purposes
c. Financial statements items likely to require adjustment
d. The kind of audit opinion likely to be given (x)

97. In developing the overall audit plan for a new client, a factor not to be considered is
a. The terms of the engagement and any statutory responsibilities
b. The client’s business, including the structure of the organization and accounting system used
c. The amount of estimated audit fee (x)
d. The audit risks and procedures to be performed to achieve audit objectives

98. A CPA may reduce audit work on a first time audit by reviewing the working papers of the predecessor
auditor. The predecessor should permit the successor to review working papers relating to matters of
continuing significance, such as those that relate to
a. Extent of reliance on the work of specialists
b. Fee arrangements and summaries of payments
c. Analysis of contingencies (x)
d. Staff hours required to complete the engagement

99. Following PSAs, which of the following is not one of the assertions made in financial statements by
management concerning each major account and class of transactions?
a. Relevance. (x)
b. Existence.
c. Valuation.
d. Presentation and disclosure.

100. Assertions are representations of management that are embodied in financial statement
components. They can be either explicit or implicit. Which of these assertions is not about valuation
or allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net realizable value.
c. Notes payable in the balance sheet include all such obligations of the entity. (x)
d. Property cost is systematically allocated to appropriate accounting period.

101. Which statement is correct?

a. A review involves the application of audit skills and techniques and the gathering of evidence.
(x)
b. A review comprises inquiry, confirmation, and analytical procedures which are designed to
review the reliability of an assertion that is the responsibility of one party for use by another
party.
c. In a compilation engagement, the accountant is engaged to use auditing expertise as
opposed to accounting expertise.
d. Since no assurance is expressed in a compilation engagement, users of compiled information
derive no benefit, even when the service has been performed with due professional skill and
care.
102. Adequate planning helps ensure that appropriate attention is devoted:
a b(x) c d

To important areas of the audit Yes Yes Yes Yes

So that potential problems are
promptly identified Yes Yes No No
So that the work is completed
expeditiously No Yes No Yes

103. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
 a. Reviewing investment transactions of the audit period to determine whether related parties
were created.
b. Performing analytical procedures to identify areas that may represent specific risks. (x)
c. Reading the minutes of stockholder and director meeting to discover whether any unusual
transactions have occurred.
d. Obtaining a written representation letter from the client to emphasize management’s
responsibilities.

104. A preliminary or entrance conference with the auditee is a useful step in avoiding
misunderstandings. Which of the following items is usually not covered in a preliminary conference?
a. Special problems known to be relevant to the audit.
b. Extent to which the independent auditor will need assistance and cooperation from the
organization’s personnel.
c. Condition of accounting records and other data sources which may affect the cope of the
audit and difficulty of completion.
d. Audit program to be followed. (x)

105. Audit programs generally include procedures necessary to test actual transactions and
resulting balances. These procedures are primarily designed to
a. Detect irregularities that result in misstated financial statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence (x)
d. Obtain information for informative disclosures.

106. A procedure designed to test for peso errors or irregularities directly affecting the correctness
of financial statement balances is a
a. Substantive test. (x)
b. Compliance test.
c. Test of controls.
d. Definition of peso-unit sampling.

107. The following statements relate to the scope of practice of accountancy. Which one is
correct?
a. Practice in Education/Academe shall constitute in a person in an educational institution which
involve teaching of accounting, auditing, management advisory services, accounting aspects
of finance, business law, taxation, and other technically-related subjects. (x)
b. Members of the Integrated Bar of the Philippines are the only ones allowed to teach business
law and taxation.
c. In connection with the practice of accountancy in commerce and industry, any position in any
business or company in the private sector which requires supervising the recording of
financial transactions, preparation of financial statements, coordinating with the external
auditors for the audit of such financial statements and other related functions shall be
occupied only by a duly registered CPA, provided that such business or company must have
authorized capital of at least Five Million Pesos (5,000,000.00) and/or annual revenue of at
least Ten Million Pesos (10,000,000.00).
d. Practice in government shall constitute in a person who holds, or is appointed to, a position in
an accounting professional group in government or in a government-owned and/or controlled
corporation, excluding those performing proprietary functions, where decision-making
requires knowledge in the science of accounting.
108. The following, except one, are the duties normally performed by the engagement partner:
a. To manage the firm.
b. To establish contact with clients.
c. To discuss with the client problems that may arise during the audit. (x)
d. To decide on questions of policy.

109. Which of the following is not a power of the Professional Regulatory Board of Accountancy?
a. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of
RA9298
b. To hold exclusive power to administer oaths in connection with the administration of RA9298 (x)
c. To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the
accountancy profession
d. To monitor the conditions affecting the practice of accountancy and adopt such measures,
including promulgation of accounting and auditing standards, rules and regulations and best
practices, as may be deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.

110. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. Financial pressures affecting employees. (x)
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.

111. Which of the following is the best criterion for evaluating a staff auditor’s work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of objectives set forth in the audit. (x)

112. International Standards on Auditing (ISAs) on which the PSAs are based are generally
applicable to the public sector, including government business enterprises. However, the applicability
of the equivalent PSAs on Philippine public sector entities has not been addressed by the Auditing
Standards and Practices Council (Note: The ASPC has been replaced by the Auditing and Assurance
Standards Council). It is the understanding of the ASPC that this matter will be addressed by:
a. The Association of CPAs in Public Practice itself in due course.
b. The Commission on Audit itself in due course. (x)
c. The Professional Regulation Commission of the Philippines itself in due course.
d. The Professional Regulatory Board of Accountancy itself in due course.

113. Materiality should be considered by the auditor when:

a. Determining the nature, timing and extent of audit procedures and evaluating the effect of
misstatements. (x)
b. Evaluating the effect of misstatements.
c. Determining the nature, timing and extent of audit procedures.
d. Evaluating the effect of misstatements but not when determining the nature, timing and
extent of audit procedures.

114. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine Institute of
CPAs.
b. Materiality depends only on the peso amount of an item relative to other fees in the financial
statements.
c. Materiality depends on the nature of an item rather than the peso amount.
d. Materiality is a matter of professional judgment. (x)

115. Pirma and Lang, CPAs, is doing the 2006 audit of SAN MIGUEL BEEF. The partner assigned to
the engagement, Mr. Pirma, works at the Manila office of the firm. Which of the following audit firm
personnel should obtain a sufficient understanding of San Miguel Beef and its environment, including
its internal control?
a. Assistants assigned to the Manila Office of Pirma and Lang, CPAs.
b. The whole team assigned to the San Miguel Beef audit engagement. (x)
c. All firm professionals, regardless of their involvement in the engagement.
d. Only Mr. Pirma, since is he is the one to sign the audit report for San Miguel Beef’s 2006
financial statements.

116. The following statements relate to Councils mentioned in the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004. Which of these statements is incorrect?
 a. The Chairpersons of the FRSC and the AASC shall both be appointed by the Professional
Regulation Commission.
b. Any member of any existing accounting and auditing standard-setting council shall not be
disqualified from being appointed to the FRSC and the AASC as the case may be for the terms
provided herein.
c. The Education Technical Council was created to assist the Professional Regulation Commission
in carrying out its powers and functions and to further assist in the attainment of the
objective of continuously upgrading the accountancy education in the Philippines. (x)
d. The PRC CPE Council shall be composed of a chairperson and two (2) members.

117. Auditing standards require the auditor to obtain an understanding of the client’s internal
controls
a. for every audit (x)
b. for first-time audits
c. sufficient to find any frauds which may exist
d. whenever it would be appropriate

118. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities, information and communication
systems, and monitoring. (x)
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy and organizational structure.

119. An auditor should obtain sufficient knowledge of an entity’s information system relevant to
financial reporting to understand the
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates (x)
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud

120. Internal control cannot be designed to provide reasonable assurance regarding the
achievement of objectives concerning
a. Reliability of financial reporting
b. Elimination of all fraud (x)
c. Compliance with applicable laws and regulations
d. Effectiveness and efficiency of operations

121. The following statements relate to reinstatement, reissuance and replacement of revoked or
lost certificates. Which one of these statement(s) is(are) correct?
(1) The Board may, after the expiration of two (2) years from the date of revocation of a
certificate of registration and upon application and for reasons deemed proper and
sufficient, reinstate the validity of a revoked certificate of registration and in so doing,
may, in its discretion, exempt the applicant from taking another examination.
(2) A new certificate of registration to replace lost, destroyed, or mutilated certificate/license
may be issued, subject to the rules promulgated by the Board and the Commission, upon
payment of the required fees.
(3) The Board shall issue a resolution, subject to the approval of the Commission in granting
a petition for reinstatement to the practice of accountancy.

a. (1) and (2)

b. (1) and (3)
c. (2) and (3)
d. (1), (2), and (3) (x)

122. Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered indicators of possible
fraud?
 a. Managers regularly assuming subordinates’ duties.
b. Managers dealing in matters outside their profit center’s scope.
c. Managers not complying with corporate directives and procedures.
d. Managers subject to formal performance reviews on a regular basis. (x)

123. Which of the following statements is incorrect?

a. Internal auditing relates to audit which serves the needs of management.
b. Government auditing often extends beyond examinations leading to the expression of opinion
on the fairness of financial presentation and includes audits of efficiency, effectiveness and
compliance.
c. A compliance audit is designed to evaluate the efficiency and effectiveness of an organization
or some part thereof. (x)
d. CPA firms, internal auditors and governmental auditors can perform operational audits.

124. A comprehensive and constructive examination of the organizational structure of a company,

institution, or branch of government or any component thereof, its plans and objectives, its means of
operation and its use of human and physical facilities to reveal defects or irregularities and to indicate
possible improvements is called
a. Financial audit
b. Management audit (x)
c. Government audit
d. Internal audit

125. In an audit situation, communication between the successor and predecessor auditors should
be
a. Documented in an engagement letter.
b. Acknowledged in a representation letter.
c. Initiated by the successor auditor. (x)
d. Written and included in the audit report.

126. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor.
b. Successor auditor. (x)
c. Principal auditor.
d. Interim auditor.

127. JM, CPA, requested permission to communicate with the predecessor auditors of a
prospective client. The prospective client’s refusal to permit this will bear directly on JM’s decision
concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting principles between years.
c. Apparent scope limitation.
d. Integrity of management. (x)

128. The auditors will not ordinarily initiate discussion with the audit committee concerning the
a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company’s organization will influence the scope of the
examination.
c. Details of potential problems which the auditors believe might cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply. (x)

129. The policy on delegation states that there is to be sufficient direction, supervision and review
of work at all levels to provide reasonable assurance that the work performed meets appropriate
standards of quality. These procedures include the following, except:
a. Provide for the approval of the scheduling and staffing of the audit by the auditor. (x)
b. Provide procedures for planning audits.
c. Provide procedures for maintaining the firm’s standards of quality for the work performed.
d. Provide on-the-job training during the performance of audits.

130. According to the IRR, how many representatives of the Quality Review Committee will come
from the accredited national professional organization of CPAs?
a. Five members (x)
b. Four members
 c. Six members
d. Seven members

131. Which of the following statements is incorrect?

a. Per PSA 220, the auditor means the person with the final responsibility for the audit.
b. The auditor should implement those quality control procedures which are, in the context of
the policies and procedures of the firm, appropriate for the individual audit.
c. The work performed by each assistant needs to be reviewed by personnel of at least equal
competence.
d. The procedures on skills and competence include those for hiring, for professional
responsibilities and for advancement. (x)

132. The following fraud risk factors relate to industry conditions, except:
a. New accounting, statutory or regulatory requirements that could impair the financial stability
or profitability of the entity.
b. A high degree of competition or market saturation, accompanied by declining margins.
c. Unusually rapid growth or profitability, especially compared with that of other companies in
the same industry. (x)
d. A declining industry with increasing business failures and significant declines in customer
demand.

133. If there is a risk of material misstatement resulting from fraud that may involve or result in
improper revenue recognition, which of the following is the most appropriate course of action for
the auditor to take?
a. Review the entity’s inventory records to help identify locations, areas or items for specific
attention during or after the physical inventory count.
b. Confirm with customers certain relevant contract terms and the absence of side agreements.
(x)
c. Perform tests of non-standard journal entries affecting long-term liabilities to confirm that
they are adequately supported and reflect the underlying events and transactions.
d. Request the assistance of an expert, taking care to ensure that the expert’s assumptions,
methods or findings have also been reviewed by the auditor.

134. When evaluating the possible effect of noncompliance on the financial statements, the
auditor considers the following, except:
a. The potential financial consequences, such as fines, penalties, damages, threat of
expropriation of assets, enforced discontinuation of operations, and litigation.
b. Whether the auditor should be held responsible for preventing such non-compliance. (x)
c. Whether the potential financial consequences require disclosure.
d. Whether the potential financial consequences are so serious as to call into question the fair
presentation given by the financial statements.

135. According to the Implementing Rules and Regulations, which portion of RA9298 embodies the
legislative intent in enacting the Philippine Accountancy Act of 2004?
a. Short title.
b. Objectives.
c. Declaration of policy (x)
d. Scope of practice.

136. Practice of public accountancy shall constitute in a person, be it his/her individual capacity, or
as a partner or as a staff member in an accounting or auditing firm, holding out himself or herself as
one skilled in the knowledge, science and practice of accounting, and as a qualified person to render
professional services as a CPA, or offering or rendering, or both, to more than one client on a fee
basis or otherwise, services such as the following, except:
a. The audit or verification of financial transactions and accounting records.
b. The preparation, signing or certification for clients of reports of audit, balance sheet, and
other financial, accounting and related schedules, exhibits, statements or reports which are to
be used by stockholders or for publication or for credit purposes, or to be filed with a court or
government agency, or to be used for any other purpose.
c. The design, installation, review, and revision of accounting systems and controls.
d. When he/she represents clients before government agencies on tax and other matters outside
the province of accounting. (x)

137. The following statements pertain to the rules and regulations on the accreditation of
individual CPAs, firms and partnerships of CPAs engaged in the public practice of accountancy. Which
one is correct?
a. Within sixty days from the effective date of the revised rules and regulations, individual CPAs,
firms, and partnerships of CPAs who/which are not yet registered shall register with the Board
 and the Commission in the manner provided for in the Implementing Rules and Regulations of
the Philippine Accountancy Act of 2004.
b. The registration shall be valid for a period of two years.
c. Renewal of registration shall be made every three years on or before November 30 on the
year of expiry upon compliance with the requirements set forth in the Implementing Rules
and Regulations.
d. The registration of applicants approved during any month of the year shall expire on the third
year following its approval. (x)

138. Individual CPAs, firms, and partnerships of CPAs organized after the effective date of the
revised rules and regulations set forth in Annex A of the IRR shall register with the board and the
commission and:
a. Shall not commence the practice of public accountancy until a valid Certificate of Registration
has been issued. (x)
b. Shall not commence the practice of public accountancy until a valid Certificate of
Commissioning has been issued.
c. Subject to favorable recommendation of the Board, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid for
two years.
d. Subject to favorable recommendation of the Commission, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid for
three years.

139. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective
manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit report, in order to reduce audit risk to an acceptably low level. (x)
c. Planning involves the engagement partner and other key members of the engagement team
to benefit from their experience and insight and to enhance the effectiveness and efficiency of
the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the engagement.

140. In performing MAS engagement, CPAs should not take any positions that might
a. Constitute advice and assistance.
b. Provide technical assistance in implementation.
c. Result in new organizational structure.
d. Impair their objectivity. (x)

141. The overall attitude and awareness of an entity’s board of directors concerning the
importance of the internal control structure usually is reflected in its
a. computer-based controls
b. system of segregation of duties
c. control environment (x)
d. safeguards over access to assets

142. Which of the following statements is incorrect?

a. Competence as a CPA includes having the required technical qualifications to perform an audit
engagement.
b. Generally accepted auditing standards are best described as the conventions, rules and
procedures that are necessary to define the accepted accounting practices at a particular
time. (x)
c. Generally, evidential matter is considered sufficient when there is enough of it to afford a
reasonable basis for an opinion.
d. An annual report is a document, which an entity ordinarily issues on an annual basis, which
includes its financial statements together with the audit report thereon.

143. The following statements relate to the Philippine Institute of Certified Public Accountants
(PICPA). Which one is incorrect?
a. A director can only represent a sector in a region if he/she has been a member in good
standing in such sector in the region for at least two years at the time of his/her nomination.
b. There shall only be fourteen national directors, unless there is a valid reason to have
additional representation. (x)
c. The national directors shall be apportioned according to sectors in the four geographic sectors
based on the ratio of latest available number of members in good standing from those areas.
 d. It shall have a full-time career Executive Director who shall implement the policies
promulgated by the PICPA Board of Directors and shall have direct supervision over the PICPA
Secretariat.

144. 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. F, 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 F is essential for the advancement of accountancy in the Philippines. F 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. L, 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. L is granted a temporary/
special permit to practice for the particular work that he is being engaged. There is no
Filipino CPA qualified 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. S, 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 and performing
compilation work for local enterprises. (x)

145. The following except one, are examples of the type of information that may come to the
auditor’s attention that may indicate that noncompliance with laws or regulations has occurred:
a. Investigation by government departments or payment of fines or penalties.
b. Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
c. Purchasing at prices approximating market price. (x)
d. Existence of an accounting system which fails, whether by design or by accident, to
provide an adequate audit trail or sufficient evidence.

146. Eugene, CPA is planning the audit of Ghostfighter Corporation’s 2006 financial statements. In
documenting the terms of engagement, which of the following statements is most likely to appear in
Eugene’s engagement letter?
a. “Fees for our services are based on our regular per diem rates, plus travel and other out-of
pocket expenses and a certain percentage of the tax savings as a result of audit adjustments
to net income.”
b. “Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatements may remain undiscovered.” (x)
c. “During the course of our audit, we may observe opportunities for economy in, or improved
controls over your operations.”
d. “In addition to our report on the financial statements, we expect to provide you with a
separate letter concerning any material weaknesses in accounting and internal control
systems which did not come to our notice.”

147. The following statements pertain to audit planning and materiality. Which one is incorrect?
a. The extent of planning will vary according to the size of the entity, the auditor’s experience
with the entity and knowledge of the business, and the complexity of the audit engagement.
b. Materiality provides a threshold or cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be useful.
 c. Materiality is most useful in assessing the scope of an auditor’s program relating to various
amounts.
d. An overall audit program is first prepared, followed by the development of the overall audit
plan and the establishment of an overall audit strategy. (x)

148. The auditor’s duty of confidentiality would ordinarily preclude the reporting of fraud or error
to a third party. However, in certain circumstances, the duty of confidentiality is justifiably overridden
by the following, except:
a. Law.
b. Statute.
c. Courts of law.
d. Pressure from a competitor of the audit client. (x)

149. Which of the following statements is correct?

a. A profession is distinguished by certain characteristics, one of which is the collection of fees
for services rendered and the fee is based on written agreements with the client.
b. Retainer fee basis is the method of billing clients whereby the billing is done on the basis of
actual time spent by the staff multiplied by the hourly rates agreed upon.
c. The sole proprietorship, corporate, and partnership forms of business organization are the
only allowable legal forms of public accounting practice in the Philippines.
d. The Securities and Exchange Commission shall not register any corporation organized for the
practice of public accountancy. (x)

150. The audit procedures deemed necessary in the circumstances to achieve the objective of the
audit refer to:
a. Audit program
b. Audit objective
c. Substantive procedures
d. Scope of an audit (x)
 lOMoARcPSD|8456182

Auditing: CASH AND CASH Equivalents

Bachelor of Science in Accountancy (Polytechnic University of the Philippines)

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SYNCHRONOUS 1 OCTOBER 14
Cash and Cash Equivalents
Cash
 Financial asset 6. Company’s postdated checks, unreleased
 Unrestricted checks, undelivered checks
 Initial & Subsequent measurement @face  Cash
value 7. Compensating balances
Composition  Legally Restricted: current/noncurrent
1. Cash on Hand asset
 Undeposited collections  Not legally restricted: Cash
 Working funds 8. Cash set aside for long term specific purpose
2. Cash in bank  Noncurrent asset
 Demand deposits
 SA/CA unrestricted Petty Cash Fund
Cash Equivalent Accountability: should be balance of petty cash
 3-month rule count
Notes 1. Imprest balance
1. Foreign currency 2. Collections (with or without official
 Restricted: Other Asset receipt)
 Unrestricted: Cash 3. Accommodation check
2. Cash in closed banks 4. Currency in envelope
 Receivable (written in recoverable value) Accounted for: actual cash count
3. Customers Postdated, DAIF, DAUD, NSF checks 1. Bills and coins
and IOU notes 2. Checks collected
 Receivable 3. Accommodation check
4. Postage stamps, Expense advances 4. Unreplenished vouchers
 Prepaid expenses 5. Replenishment checks
5. Bank Overdraft 6. Actual currency inside envelope
 Can be offset (if there is also another
positive account in same bank)
 Cannot be offset (current liabilities)

Bank Reconciliation
NSF checks
Previou Receipts Disbursement Current
s
NSF check prev. month, redeposited current month (xxx) xxx (xxx) xxx
NSF check current month, redeposited current month xxx xxx
NSF check current month, redeposited next month xxx (xxx)
Bank Errors
Erroneous Previous Receipts Disbursement Current
deposit previous month, corrected current month (xxx) (xxx)
deposit current month, corrected current month (xxx) (xxx)
deposit current month, corrected next month (xxx) (xxx)
deposit previous month, corrected next month (xxx) (xxx)

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Erroneous Previous Receipts Disbursement Current

Charges previous month, corrected current month xxx (xxx)
Charges current month, corrected current month (xxx) (xxx)
Charges current month, corrected next month (xxx) xxx
Charges previous month, corrected next month xxx xxx

CASES
CASE 5
Accountability Allocation of Shortage
Imprest balance 50,000 General Cash Fund
Official Receipts 198,500 Bills and Coins 24,230
Unofficial Receipt 56,000 OR 3052 (65,500)
Accommodation check 6,800 OR 3054 (25,000)
Envelope money 35,000 Deficiency in envelope (15,000)
Total 346,300 Cash shortage 81,270

Accounted for Petty Cash Fund

Bills and Coins 24,230 Imprest fund 50,000
Official check receipts 108,000 Unreplenished
Unofficial check receipt 56,000 vouchers (37,100)
Accommodation check 6,800 Accommodation check 6,800
Unreplenished Expenses 37,100 Should be balance 19,700
Replenishment 5,000 Replenishment 5,000
Cash in envelope 20,000 Accommodation check 6,800
Total 257,130 Actual balance 11,800
Shortage 89,170 PCF shortage 7,900

1. PAJE 3. 11,800
2. a. 7,900; b. 81,270 4. 330,030

CASE 7
June Receipts Disbursement July
Unadjusted balances per bank 86,295 375,840 451,695 10,440
Deposit in Transit, June 30 9000 (9,000)
Outstanding check, June 30 (26,130) (26,130)
Note e: Debit Error (5,940) 5,940
Outstanding checks, July 31 28,910 (28,910)
Deposit in Transit, July 31 15,000 15,000
.
Total 69,165 381,840 440,535 10,470
June Receipts Disbursement July
Unadjusted balances per book 70,165 381,840 327,165 124,840
Note d: Unrecorded disbursement 15,900 (15,900)
Note g: DAUD check 4,665 (4,665)
Note paid by bank 91,500 (91,500)
Bank service charge, July 1,305 1,305
Total 70,165 381,840 440,535 11,470

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 lOMoARcPSD|8456182

Outstanding checks Deposit in transit, beginning 9,000

Outstanding check, beginning 26,130 Receipts per book 381,840
Disbursement per book 343,065 less: Receipts per bank 375,840
less: Disbursement per bank (348,285) Outstanding check, end 15,000
Outstanding check, end 28,910
Deposit in transit
1. 28,910 3. 1,000
2. 15,000 4. 11,470

CASE 10
Novembe Receipts Disbursement December
r
Unadjusted balances per bank 803,115 2,018,310 1,787,798 1,033,627
Deposit in transit 65,100 (65,100)
Outstanding check, Nov. 30 (72,400) (72,400)
Outstanding check, Dec. 31 66,320 (66,320)
Note e: Credit Error (45,000) (45,000)
Note e: Debit Error (22,000) 22,000
Deposit in transit, Dec. 31 125,050 125,050
.
Total 750,815 2,078,260 1,714,718 1,114,357
Novembe Receipts Disbursement December
r
Unadjusted balances per book 503,705 2,033,130 1,753,118 783,717
Bank Service Charge, Nov. 30 (700) (700)
Bank Service Charge, Dec. 31 300 (300)
ISF check, Nov. 30 (12,500) (12,500)
ISF check, Dec. 31 19,600 (19,600)
NR received by bank, Nov. 30 280,310 (280,310)
NR received by bank, Dec. 31 309,440 309,440
Note f: Debit Error (5,000) (5,000)
Note g: Debit Error (20,000) (20,000)
Note h: Credit Error 21,000 (20,100) 41,100
Total 750,815 2,078,260 1,714,718 1,114,357

Deposit in transit
Deposit in transit, beginning 65,100
Receipts per book 2,078,260
less: Receipts per bank (2,018,310
)
Deposit in transit, end 125,050

1. 125,050 4. 783,717
2. 783,717 5. 1,114,357
3. 1,753,780

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Auditing III - Revenue and Receivables

Audit and Assurance (Association of Chartered Certified Accountants)

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AUDITING III
(ACCN 3015/6)
Revenue and
receivable cycle

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TABLE OF CONTENTS
1. Objectives....................................................................................................... 3
2. References and disclaimer..............................................................................3
3. Process followed............................................................................................. 3
4: Scope.............................................................................................................. 4
5. Purpose of the sales and receivables business process.................................5
6. Understanding the cycle................................................................................5

6.1: Nature of the cycle.................................................................................... 7

6.2: Forms of transactions................................................................................7

6.3 How transactions are initiated..................................................................8

6.4: Accounts affected by the cycle.................................................................8

6.5: Accounting treatment in the cycle............................................................8

6.6: Relevant Companies Act sections.............................................................9

6.7: IT and Information systems used in the cycle.........................................10

6.8. Risks in the cycle...................................................................................11

6.9. Control objectives...................................................................................12

7: Functional areas linked to controls and considerations................................13
8: Integrated example...................................................................................... 14

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1. OBJECTIVES

The overall objective of this course is to obtain an understanding of the inventory

and production cycle to perform the following tasks:

a) To identify weaknesses and/or deficiencies in a revenue and receipts cycle

and make recommendations;
b) To identify risks in a revenue and receipts cycle and make
recommendations to mitigate the risks; and
c) To identify risk of material misstatement in a revenue and receipts cycle
and respond to the risks in terms of ISA 330

2. REFERENCES AND DISCLAIMER

These notes present an outline of the course topic to assist the students in their
preparation for assessments. References have been made to relevant areas in
the text book to assist the student in working through the literature.

When you have completed studying these notes and the relevant sections of the
text and you have completed the set tutorials without referring to the solutions,
you should be able to meet the outcomes of this topic.

Referenced Text book: Auditing fundamentals in a South African

context (Prinsloo et al.)Chapter 6

3. PROCESS TO BE FOLLOWED

1
5 To understand the
Control objectives and
To understand purpose of the
business process
functional process areas ISA 200, ISA 315R & Ch 6
ISA 200, ISA 315R &
Ch 6

Objective To understand the

To understand the IT
and other Risks s types of transactions in
ISA 200, ISA 315R & Ch
6
the business process
ISA 200, ISA 315R, Ch
2
6.

4
To understand the
accounting treatment and
functional areas
ISA 200, ISA 315R & Ch 6

4: SCOPE
3
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Figure 1: Overview of the notes

Purpose of the cycle ISA 200,

315R, Ch
REQ 1 6.1.1

ISA 200,
Types of transactions in the cycle ISA 315

REQ 2 R, Ch
614

ISA 315R,
Accounting treatment and functional areas IAS’s, Ch
REQ 3 6.1.6

IT and other risks ISA 315R,

Ch 6.4

REQ 4

Control objectives and functional cycle areas ISA 315R,

REQ 5 Ch6.6

5. PURPOSE OF THE SALES AND RECEIVABLES BUSINESS

PROCESS

Revenue is generated through the sale of goods or the delivery of services. In

exchange for the sale of goods and the delivery of services, cash is received from
customers. This is the main purpose of a profit-driven entity as this is a top-line
item in the financial statements and an indicator of growth in an entity. The
course notes will focus on the accounting function of the business process.
The primary purpose of this cycle is to ensure:

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1. That revenue generates from sale of goods or rendering of services is

recorded correctly;
2. Cash generated from the revenue activities is collected and recorded and
3. That all related activities are accounted for correctly.

ACTION POINT

Please refer to Section 6.3.6 (Auditing fundamentals in a South

African context (Prinsloo et al, 2015) for an overview of the
sales and receivable cycle.

6. UNDERSTANDING THE CYCLE

ISA 315 deals with the auditor’s responsibility for gaining an understanding of
the entity, its environment and internal controls in order to identify and assess
the risk of misstatement in the financial statements (ISA 315, para 1-3). The
standard specifies the different ‘elements’ or aspects of the entity on which the
auditor should focus. Following on from this base, we will form an understanding
of the cycle based on analysing the elements below:

1) The nature of the cycle

2) Forms of transactions
3) How transactions in the cycle are initiated
4) Accounts affected by the cycle
5) Accounting treatment in the cycle
6) Relevant Companies Act and accounting sections and standards
7) IT and Information systems used in the cycle
8) Risks in the cycle
9) Control objectives in the cycle

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Identify the risk per assertion over the process and

develop response
Understand the relationship with other
The auditor must, after obtaining and understanding of the
business processes
process, identify if there are any risks associated with the
process per assertion and respond to the risk as part of their The auditor needs to understand that there is a
H – Risk A - Link relationship between revenue and receivables as
audit procedures. Please see Ch 6, S6.4
and with they affect one another, i.e. one is the debit and
assertio other the other the credit in the general ledger
Understand the controls over the process accounts.
The audit must obtain an understanding of the
ns cycles
controls in the process in place by management Understand the types of revenue sources
over the entire process and compare to and the nature there off
understanding obtained in other processes. The auditor needs to obtain an understanding of
Please see Ch6, S6.3.6, 6.6 &S6.7 G- B - Type
the types of revenue sources and the nature of
Understand the information system used in
Control of the revenue (i.e. whether the revenue is a sale or
the process flow and inventor service). The auditor also has to understand if the
process y revenue is on cash or credit terms or a
Entities must implement information systems for
all cycles, which includes accounting systems.
ISA 315 – combination of both. Please see Ch8, section
The auditor has to obtain an understanding of the
information systems as this could assist in
Under- 6.1.2 & 6.1.4

identifying additional risk. Please see Ch6,

section 6.3 for more information and pay
stand the
special attention to the following: F - IS cycle C-
Understand the accounting policy
IAS 18: Revenue and IFRS 15: Revenue from
Supporting documentation (S6.3.2.1) used in Account- Customer Contracts sets out the accounting
Journals and ledgers (S6.3.2.2) the ing treatment for the different types of revenue.
Databases and masterfiles (S6.3.3) cycle Policy Please see IFRS 15 notes from FinAcc and Ch8,
Reports (S6.3.4) Section 6.1.6 for the accounting treatments.
Reconciliations (S6.3.5)

E- D- Understand the accounts affected

Understand the functional areas in the process Function Major Understanding which accounts is affected by a
The auditor needs to understand what different functional areas s in the Account specific transaction will enable better
are involved in the revenue and Receipts process as all of these understanding of the risks involved in the
areas and activities take place to ensure that the transactions process s transactions throughout the cycle. Please see
are executed properly and are recorded accurately in the Ch6, section 6.1.5
accounting records. Please see Ch6, section 6.2 for a detailed
description of the different functional areas. Pay attention to the
purpose, activities and person(s) involved in each area of the
process as this will assist you in understanding the cycle

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6.1: NATURE OF THE CYCLE

The nature and purpose of the revenue cycle is summarised by Prinsloo et al (2015),
Section 6.1.

Nature and
Forms of
purpose of Varied nature
revenue
cylcle (Section (6.1.3)
(Section 6.1.2)
6.1.1)

Functional Accounting
areas implications
(Section 6.2) (see below)

6.2: FORMS OF TRANSACTIONS

IFRS 15 distinguishes between revenue from the satisfaction of a performance obligation

at a point in time and from satisfaction of a performance obligation over time.

. ACTION POINT

Refer to IFRS 15 and your second year accounting course notes.

 What is the definition of ‘revenue’ per IFRS 15?

 How do you distinguish between performance obligations

satisfied over time and those at a point in time?

 What types of transactions are specifically excluded from IFRS

15?

6.3: HOW TRANSACTIONS ARE INITIATED

The revenue cycle starts with an order that has been received from a customer.
The Receivables cycle starts once the revenue has been accounted for but the
cash consideration has not yet been received. The revenue cycle ends as the
receivable cycle begins. Please see Ch6, S6.1.4 for more details on how the
transactions are initiated and completed.

Reference: Auditing fundamentals in a South African context (Prinsloo et al)

Chapter 6.

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6.4: ACCOUNTS AFFECTED BY THE CYCLE

The transaction process will vary from client to client depending on the
complexity of the business process and the accounting software used. Prinsloo et
al, Section 6.3 provides an overview of a typical accounting system and a
diagrammatic representation of the accounting process.

ACTION POINT

Refer to the illustration of the transaction flows in Prinsloo et al

(2015), Section 6.3. What are the essential/key processes?

6.5: ACCOUNTING TREATMENT IN THE CYCLE

Accounting Requirements
IFRS 15 – Scope  Not all transactions are in the
scope of IFRS 15. These need
to be dealt with in
accordance with the relevant
IFRSs.
 IFRS 15 is only applicable to
transactions with customers
(IFRS 15, para 7)
IFRS 15 – Identification of performance  For each contract with a customer,
obligations performance obligations should be
identified.

 This requires the provision of

distinct goods and services to the
customer (see IFRS 15, para 26-28)
IFRS 15 – Satisfaction of the  Performance obligations are either
performance obligation satisfied at a point in time or over
time (see IFRS 15, para 15).
 The determination of the timing of
the satisfaction of performance
obligations is important because
this will affect the amount and
timing of revenue recognition.

IFRS 15 – Measurement  Determination of the transaction

price of the goods/services provided

 Different methods for allocation

transaction prices to performance
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Accounting Requirements
obligations

 Effect of the time value of money

 Guidance on the accounting for

variable consideration
IFRS 15 – Contract costs  Accounting for costs incurred on
contracts with customers

 Note: construction contracts are

covered in detail in Financial
Accounting III
IFRS 15 – Presentation and disclosure  Extensive presentation and
disclosure requirements

6.6: RELEVANT COMPANIES ACT SECTIONS

Remember the provisions of the Companies Act covered in Auditing II. These can
be included as part of a test or exam question.

The figure below summarises some of the statutory or corporate governance

considerations which may be applicable in the context of the sales and
receivables process.

Pre- Limitations
incorporation on type of
contracts in revenue
scope of IFRS contracts by
15 MOI

Corporate
Board governance
considerations
approval for specific to the
material sales and
contracts receivable
process

6.7: IT AND INFORMATION SYSTEMS USED IN THE CYCLE

Prinsloo et al (2015), Chapter 6 deals with IT systems in the revenue and

receivable cycles.

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Refer to Section 6.3 for a discussion on information technologies and 6.5 for an
outline of computer technologies. In addition, Chapter 14 (Section 14.4) is
relevant:

Figure 4: CAATS
Auditing
Software
around,
checks and
Use of CAAT's through and
system
with the
descriptions
computer

Specifc test Reasons for

procedures using CAATs

See Prinsloo et al (2015), Chapter 14, Section 14.4

. ACTION POINT

Refer to Prinsloo et al (2015), Chapter 14, Section14.4.

The textbook refers to specific tests which an auditor might perform

using CAAT’s. Discuss how these could be modified to test controls
over the sales and receivable processes. Refer to Section 6.9 below
for control objectives.

6.8. RISKS IN THE CYCLE

The risk in the cycle is heavily dependent on the nature and type of revenue that is held
or produced by an entity. The main risks are indicated below but this is not a complete
list. Through the completion of tutorials and other questions, this list can be expanded.
Please see ch 6.4

Financial Reporting Missappropriation Stolen or damaged Incorrect cost

Inaccurate
Risks Risks Inventory
Overstatemnet allocations
Risk of fraud Theft of goods inventory
of inventory
valuation

6.9. CONTROL OBJECTIVES

A modern business cannot function without any information technology as information

technology has become more than just a mechanism for processing information. IT is
now regarded as a strategic resource. As the use of IT can open up an entity to the
following financial risks:

1. Transactions recorded are not valid transactions (Validity)

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2. Transactions recorded are not complete (Completeness)

3. Transactions have not been recorded accurately (Accuracy)

To address the above mentioned risk, management has to implement application control.
Refer to Chapter 5, section 5.9 for more information on the application controls.

The figure below indicates the control objectives of the cycle. Please see Chapter 6,
section 6.6 for more information on the control objectives.

Validity

Control
objectives

Completeness

Accuracy

7: FUNCTIONAL AREAS LINKED TO CONTROLS AND

CONSIDERATIONS

As with any other business process, there are generic controls that are applicable
to the cycle. These controls can be found in any other cycle. Students have to
ensure that they understand the controls as they will have to demonstrate their
understanding of these in assessments.

The internal controls are set out in figure 3 below and are applicable across the
entire business process, i.e. in each functional area of the process. Please see
the relevant sections as indicated in the section below

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Documentation Authorisation Access Controls Segregation of Independent

and records and approval Section 6.7.1.4 duties checks and
Section 6.7.1.1 Section 6.7.1.2 Section 6.7.1.3 reconciliations
Section 6.7.1.5

Figure 1 Controls in the business process

As you work through the course material and literature, please pay attention to
the following areas for each of the functional areas in the business process. This
will not only help you to understand the process in sufficient detail but will assist
you during assessments.

Who is responsible for the functional area?

Link to segregation of duties objectives
Who

What document is required?

Link this to documentation and authorisation objectives
What

When should approvals and reconciliations be given and performed?

Link to authorisation and independent review control objectives
When

Where are the assets being kept?

Link to Safeguarding of assets
Where

Consider the purpose of the control objective and if the control objective has been met
If the control is not present, consider if there is a control deficiency
Why Link the above to the assertions to determine if there is a risk for the inventory item

Refer to the Internal Control Tables – Auditing Fundamentals in a South African

Context: - Pages 215 - 239 for a description on the Revenue and Receivable cycle

8: INTEGRATED EXAMPLE

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You are a second year trainee accountant at MGPK and are currently
assigned to the audit of Free-Bee TV Limited (Free TV). Your firm has been
auditing this client for the past three years since Free TV’s incorporation.
Free TV is a subscription-based television channel distributor, providing
programming content in South Africa and the rest of Africa. Free TV was
set up as a competitor to DSTV.

The company’s year- end is 31 May.

Audit materiality has been set at R650 000. You noted from last year’s
audit file that the controls at the client were assessed as reliable in the
past.

You are currently auditing the revenue section and have identified the
following significant income streams:

 Sales of decoders to retailers. Decoders are sold to retailers in bulk and

these are then sold on to Free TV subscribers at R950 each.
Subscribers require a satellite dish to receive the Free TV signal. These
can be purchased and installed for a further R1000. It is possible to
purchase only one component, e.g. apartment blocks can purchase a
single satellite dish. As a result residents only have to purchase the
decoder.
 Subscription revenue is received from each subscriber who pays a
monthly subscription fee of R389 to view the programs on the TV
channels subscribed to. The subscription is received in advance.
 Free TV also has the option for subscribers who do not want to buy
their own decoder, to rent a decoder from Free TV over a five-year
contract period. The rental is R459 per month (this includes the
monthly rental of the decoder and the monthly subscription of R389).
At the end of the five–year contract, ownership of the decoder vests in
the subscriber.
You noted that in respect of the rental customers, Free TV raises an asset
for the decoders rented and impairs the cost of the decoders over the five-
year contract. If a decoder is not functional, Free TV will replace it at no
additional cost to the subscriber. If the decoder is stolen, however, the
loss is covered by insurance, for which a monthly premium of R25 is
included in the monthly rental of the decoder. Free TV replaces the
decoder and claims the loss from the insurance company.

Free TV has been growing rapidly and the number of subscribers has
increased from 890 000 last year to over 1 million in the current year.
Revenues from all income streams for the current financial year are
expected to exceed R4.8 billion.
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SUBSCRIPTION REVENUE

On reading the system notes in the previous year‘s audit file you noted
the following:

 A new subscriber can apply for a Free TV subscription:

 Online via the Internet at Free TV’s website by completing the
online registration form.
 Telephonically – an assistant at the call centre will complete
the details and register a subscription.
 By sending a fax – with all the required details.
 For each of the above, the subscriber’s name, address, (physical and
postal), contact telephone numbers, ID number and bank account
details are required. All this information is used in drawing up a
contract with the subscriber and a new subscriber file is opened on the
subscriber master file.
 An ITC credit check is performed on each potential subscriber. The
results of these checks are loaded against the subscriber file in the
master file.
 A standard contract is printed from the computer system and a
sequential Contract number is generated and the decoder serial
number is recorded. The contract is posted to the client for signature.
Once signed and returned the contracts manager, Mr Nadia, updates
the subscriber master file and activates the decoder electronically.
 Each subscriber has to pay a monthly subscription of R389 in order to
view all TV programmes. As new contracts may be taken out at any
time, the first payment could be made at any time in the month and
the subscription amount is pro- rated for the number of days
subscribed for in that month. Thereafter, subscriptions are run on the
1st business day of each month by debit order against the subscriber’s
bank account.
 The subscriber master file contains the decoder serial number so that
each subscriber and decoder can be identified.
 The computer system has been effective for the past three years, and
Mr Nadia monitors the effectiveness of the controls on an ongoing
basis. He is responsible for comparing the numerous reports generated
and for following up on any exceptions noted from these. Procedures
include the following:
 Ensuring that all contracts generated by the system from the
various methods of application have been signed and
returned.
 Cancellation of contracts not signed and returned within 30
days. The subscriber must then apply again.

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 Comparison of the subscriber master file to the sequenced

contract numbers issued to ensure there are no missing or
duplicate contract numbers.
 Inspection of reports of the number of decoders on rental
contracts which are replaced each month.

SUBSCRIPTION AND RENTAL RECEIPTS

 Payments for subscriptions and rentals are received via bank debit
orders. On registration of a contract, each subscriber signs a bank debit
order. Mr Nadia captures these details into the subscriber database.
 A tape of all the debit orders is sent monthly to Free TV’s bankers to
process the subscriptions.
 The computer system activates a signal to the decoders of account
holders that have paid so that TV programmes may be viewed.
 If a subscriber has not paid his / her decoder signal is de-activated on
the system. The subscriber service department may be contacted and,
once payment has been made, the viewer is connected again.
 Mr Nadia inspects exception reports of subscribers who have defaulted
on payment. This usually happens if a bank account is closed.
 Only Mr Nadia can capture any changes to bank details of subscribers.
Subscribers who subscribe on-line may not change this type of
information themselves.
 If a decoder is stolen, the serial number on the decoder is used to
deactivate the signal, so that the person who stole the decoder will not
be able to use it.

INFORMATION SYSTEMS

As per discussions with Mr Tobie, the IT manager, the computer systems

that are currently being used have been working well for the past three
years.

As the IT manager, he is responsible for any software program changes

that may be required by users. These changes are mostly very small as
the software used is an off the shelf package suited to their type of
business. The changes relate primarily to items such as the format of
reports. All program changes are documented.

Mr Tobie monitors that users change passwords regularly and that each
user only has access to the relevant module of the software pertaining to
his work. Entry to the office area is controlled via magnetic swipe cards.
He has additional responsibility for back-ups, and business continuity
plans, as ensuring a stable service to viewers is crucial to Free TV’s
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continued success. Off-site back-ups are maintained and updated on a

monthly basis to ensure continuity of the business and recovery of data in
case of a disaster.

YOU ARE REQUIRED TO:

a) Identify those controls you would place reliance on at Free TV in

your audit of the revenue streams.

b) Explain how you would test the controls identified above.

Revenue solution

(a) & (b)

Control Test of control

 Contracts are drawn up for  Inspect a sample of contracts for

each new subscriber (1) authorised signatures, relevant
customer information (name,
I.D., address, banking details)
(1)
 Completeness of contracts via  Perform CAATS on the
sequential numbering. (1) sequential numbers – for a
specific period (1)
 Investigate missing or duplicate
numbers and follow up on
discrepancies with
management. (1)
 Investigate cancelled contracts
to ensure they were cancelled-
should be within the missing
numbers (1)
 An ITC credit check is  Inspect a sample of subscribers
performed on new subscribers for the results captured on the
(1) master file (1)

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 Perform a CAAT to ensure that

each subscriber on the master
file has a matching ITC check
(1)
 Access to change information  Attempt to access and change a
that is crucial on the Internet is customer detail and ensure this
denied. (1) cannot be done. (1)

 Mr Nadia performs the  Schedule ad-hoc visits to

monitoring controls and follows observe that monitoring does
up on any queries (1) take place. (1)
 Examine a sample for his
signature as evidence (1)
 Subscriber master file has the  Inspect a sample of subscribers
decoder serial number (1) on the master file and ensure
there is a decoder serial number
(1)
 Perform a CAAT to ensure that
each subscriber on the master
file has a matching serial
number (1)
 Tape sent to banks for  Enquire from Mr Nadia and Mr
payments (1) Hope to ensure the information
on the tape is accurate (1)
 Observe a tape being sent,
returned and updated. (1)

 Exception report from tape  Enquire from Mr Nadia that this

update followed by Mr Nadia on control is performed by him (1)
customers that have not paid  Examine evidence of such an
(1) exception report being printed
and scrutinized –signature (1)

 Decoder is blocked if payment  Select a sample of customers

is not received (1) that have not paid subscriptions
and whether the viewing was
stopped-and resumed once
payment was received (1)

 Account holders that have paid  Enquire of Mr Nadia how often

their subscription, obtain the he inspects this report, or does
signal he only inspect the exceptions
(1) (1)
 Run a CAAT for a specified
period or number sequence to

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compare that the decoder

getting a signal matches a
payment (1)

 Stolen decoders are  Inspect a sample of the monthly

deactivated (1) reports of decoders on rental
contract that have been
replaced, and trace to the
decoder number that was
deactivated (1)

 Physical access with swipe  Attempt to enter restricted area

cards (1) without a swipe card (1)

 Password access to module  Observe access system via

required by staff to do their passwords through ad-hoc
work (1) unscheduled visit (1)

 Mr Tobie documents all program  Inspect documentation for Mr

changes (1) Tobie’s signature (1)

 Debit orders signed by  Review debit orders for

customers (1) signature (1)

 Only Mr Nadia can change bank  Review change control audit trail
details of debit orders (1) (if this exists) for evidence that
only Mr Nadia has changed
details (1)

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Auditing Problems - Test Banks 1 and 2

Accountancy (Baliuag University)

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AUDITING PROBLEMS TEST BANK - 1

PROBLEM NO. 1

The following are selected unadjusted account balances and adjusting information of
TANYING CORP. for the year ended December 31, 2017.

Retained earnings, January 1 P 1,322,010

Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense – sales representatives 13,680
Depreciation expense – sales/delivery equipment 18,300
Depreciation expense – office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers’ salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1 269,100
Inventory, December 31 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000

Adjusting information:

(a) Cost of inventory in the possession of consignees as of December 31, 2017,

was not included in the ending inventory balance ................................................P55,800

(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance ..................................................................................... 2%

(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in) ..................................................... 6%

(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day ................................................................................................ P9,180
Average sales commissions as a percent of sales ....................................................... 3%

(e) No accrual had been made for a freight bill received on January 2, 2018, for
goods received on December 29, 2017 ................................................................ P1,710

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(f) An advertising campaign was initiated November 2, 2017. This amount was
recorded as “Prepaid advertising” and should be amortized over a six-month
period. No amortization was recorded ................................................................. P5,454

Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2017.............................................................................P10,500

(g) Interest earned but not accrued .......................................................................... P1,680

(h) Depreciation expense on a new forklift purchased March 1, 2017, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price ..................................................................................................P23,400
Estimated life in years ............................................................................................... 10

(i) A “real” account is debited upon the receipt of office supplies. Office supplies on hand at
year-end ........................................................................................................... P3,675

(j) Income tax rate (on all items) ................................................................................ 30%

Compute the adjusted balances of the following:

1. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500

2. Cost of goods available for sale

A. P684,900 B. P824,697 C. P686,697 D. P779,913

3. Inventory, December 31, 2015

A. P61,500 B. P61,350 C. P56,250 D. P117,450

4. Distribution costs
A. P181,649 B. P167,513 C. P178,013 D. P176,453

5. Administrative expenses
A. P207,345 B. P193,785 C. P194,265 D. P194,595

6. Allowance for doubtful accounts

A. P15,660 B. P16,140 C. P15,180 D. P480

7. Total income
A. P817,143 B. P811,653 C. P779,913 D. P822,153

8. Income from continuing operations before taxes

A. P231,360 B. P436,795 C. P218,995 D. P239,695

9. Office supplies inventory

A. P6,540 B. P3,675 C. P2,865 D. P 0

10. Net income

A. P237,296 B. P210,299 C. P250,289 D. P216,296

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PROBLEM NO. 2

The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY
as of December 31, 2017:

Cash ................................................................................... P 963,200

Accounts receivable ............................................................... 2,254,000
Inventory ............................................................................. 6,050,000
Accounts payable .................................................................. 4,201,000
Accrued expenses..................................................................... 431,000

During your audit, you noted that Bunching Company held its cash books open after year-end.
In addition, your audit revealed the following:

1. Receipts for January 2018 of P654,600 were recorded in the December 2017 cash receipts
book. The receipts of P360,100 represent cash sales and P294,500 represent collections
from customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2018. The payments, on which
discounts of P12,400 were taken, were included in the December 2017 check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following

information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a purchase on
December 31, 2017. The related goods, shipped FOB destination, were received on
January 4, 2018, and thus were not included in the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2017, terms FOB

destination, are not included in the year-end inventory. The goods cost P130,000 and
were delivered to the customer on January 3, 2018. The sale was properly recorded in
2018.

c. Goods costing P637,500 were shipped on December 31, 2017, and were delivered to the
customer on January 3, 2018. The terms of the invoice were FOB shipping point. The
goods were included in the 2017 ending inventory even though the sale was recorded in
2017.

d. Goods costing P217,500 were received from a vendor on January 4, 2018. The related
invoice was received and recorded on January 6, 2018. The goods were shipped on
December 31, 2017, terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These goods are not
included in the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods are not
included in the physical inventory.

Determine the adjusted balances of the following on December 31, 2017:

11. Cash
A. P963,200 B. P681,000 C. P668,600 D. P693,400

12. Accounts receivable

A. P2,908,600 B. P2,564,000 C. P2,254,000 D. P2,548,500

13. Inventory
A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000

14. Accounts payable

A. P4,790,900 B. P4,615,900 C. P4,573,000 D. P4,603,500

15. Current ratio

A. 2.00 B. 1.83 C. 1.84 D. 2.01

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PROBLEM NO. 3

The following are independent situations:

The Machinery account of PAKO COMPANY contains the following entries during the year:

Date Item Debit Credit

2017
Jan. 1 Balance P1,800,000
June 30 Purchased four new machines 1,080,000
Installation cost of new machines 48,000
Sept. 30 Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,000 P 66,000
Oct. 31 Repairs of machinery 75,000
Dec. 1 Cash paid for trade-in of old machines—cost,
P90,000; accumulated depreciation, P36,000.
Cash price of new machine, P270,000 225,000
Dec. 31 Balance 3,162,000
Total P3,228,000 P3,228,000

16. What is the correct balance of the Machinery account on December 31, 2017?
A. P3,162,000 B. P3,057,000 C. P3,048,000 D. P2,958,000

17. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the
depreciation charge for 2017?
A. P234,150 B. P300,000 C. P316,200 D. P227,400

On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines
expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton.
Production started immediately after some new machines costing P1,800,000 were bought on
June 30, 2017. These new machines had an estimated useful life of 15 years with a scrap value
of 10% of cost after the ore estimate has been extracted from the property, at which time the
machines will already be useless. Genluna’s books show the following expenses for 2017:
Depletion expense .......................................... P1,215,000
Depreciation—Machinery ..................................... 120,000

18. Recorded depletion expense was

A. Overstated by P270,000.
B. Understated by P270,000.
C. Overstated by P405,000
D. Understated by P405,000.

19. Recorded depreciation expense was

A. Understated by P60,000.
B. Overstated by P60,000.
C. Understated by P30,000.
D. Overstated by P30,000.

BULKAN COMPANY purchased a machine for P300,000 on January 1, 2014, with the following
additional items paid or incurred:

Separation pay for laborer laid off upon acquisition of new machine..................... P3,600
Loss on sale of machine replaced ........................................................................ 3,900
Transportation in ............................................................................................... 3,000
Installation cost ............................................................................................... 12,000
The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
On January 1, 2017, new parts which cost P37,800 were added to the machine so as to reduce
its fuel consumption, but with no change in its estimated life or residual value.

20. The annual depreciation charge on the machine for 2015 was
A. P34,080 B. P35,494 C. P36,450 D. P35,700

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PROBLEM NO. 4

Presented below are unrelated situations.

1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2017, Harlington Company purchased the following trading
securities:
Fair Value
Security Cost Dec. 31, 2017
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.

21. What is Harlington’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000

22. What would Harlington’s net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

2. LABADA CO.’s portfolio of trading securities includes the following on December 31, 2016:

Cost Fair Value

15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069,000 P2,961,000

All of the above securities have been purchased in 2016. In 2017, Labada Co. completed
the following securities transactions:

Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage
commission of P13,500.

April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and
other transaction costs of P4,950.

The Labada Co. portfolio of trading securities appeared as follows on December 31, 2017:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,0002
P1,885,950 P1,965,000
1
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

23. What amount of unrealized gain on these securities should be reported in the 2017
income statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000

24. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2017?
A. P144,000 B. P27,000 C. P130,500 D. P13,500

25. What amount should be reported as trading securities in Labada’s statement of financial
position on December 31, 2017?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950

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PROBLEM NO. 5

On January 1, 2016, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2017.

Expenditures on the project were as follows:

January 3, 2016 P2,500,000

March 31, 2016 3,000,000
June 30, 2016 4,000,000
October 31, 2017 3,000,000
January 31, 2017 1,500,000
March 31, 2017 2,500,000
May 31, 2017 3,000,000

On January 3, 2016, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2016 and 2017. The company’s fiscal year-end is December 31.

26. What is the amount of capitalizable interest in 2016?

A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000

27. What is the amount of capitalizable interest in 2017?

A. P630,625 B. P654,663 C. P361,707 D. P799,663

28. What amount of interest should be expensed in 2016?

A. P2,736,875 B. P2,356,250 C. P2,900,000 D. P 0

29. What amount of interest should be expensed in 2017?

A. P2,769,375 B. P3,038,293 C. P2,600,337 D. P2,745,337

30. What is the total cost of the building (including the interest capitalized in 2016 and 2017)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625

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PROBLEM NO. 6

At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The
grant is conditional upon the executive remaining in the entity’s employ until the end of year 3.

The share options can be exercised if the entity’s share price increases from P20 at the
beginning of year 1 to above P30 at the end of year 3. If the share price is above P30 at the
end of year 3, the share options can be exercised at any time during the next five years, i.e., by
the end of year 8.

The entity estimates the fair value of the share options on grant date to be P5 per option. This
estimate takes into account the following market condition:
The possibility that the share price will exceed P30 at the end of year 3, i.e., the share
options become exercisable; and
The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share
options will be forfeited.

The following actual events occurred in years 1 to 3:

Year 1

The share price has increased to P24.

The entity’s estimate of the fair value of the options is P4 at the end of year 1. This takes
into account whether the market condition will be satisfied by the end of year 3.

Year 2

The share price has decreased to P22. However, the entity remains optimistic that the
share price target will be met by the end of year 3.
The estimated fair value of the share options is P3. Again, this estimate takes into account
the market condition noted above.

Year 3

The share price only reaches P28 by the end of year 3.

The estimated fair value of the share options is zero, as the market condition has not been
satisfied.

31. Compensation expense for year 1

A. P30,000 B. P40,000 C. P50,000 D. P60,000

32. Compensation expense for year 2

A. P30,000 B. P40,000 C. P50,000 D. P60,000

33. Compensation expense for year 3

A. P 0 B. P30,000 C. P40,000 D. P50,000

34. Share options outstanding at the end of year 2

A. P70,000 B. P80,000 C. P90,000 D. P100,000

35. Cumulative compensation expense for the three-year period

A. P 0 B. P70,000 C. P100,000 D. P150,000

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PROBLEM NO. 7

The following independent situations relate to the audit of shareholders’ equity. Answer the
questions at the end of each situation.

BRANDY CO. was organized at the beginning of the current year. The following shareholders’
equity accounts are included in the entity’s year-end trial balance.

Preference share capital, P100 par, authorized 100,000 shares,

issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares,
issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000

The following current year transactions relate to Brandy Co.’s shareholders’ equity:

 Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference
shares. Subscriptions to ordinary shares were also received on the same date.

 During the year, subscriptions were received for an additional 12,000 preference shares at a
price of P120 per share.

 Cash payments were received from subscribers at frequent intervals for several months
after subscription. The company’s policy is to issue share certificates only upon full
payment of the share subscription.

 Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a
tract of land with a fair value of P690,000.

36. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000

37. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000

38. The company’s statement of financial position at the end of the current year should report
contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000

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The following shareholders’ equity accounts are included in the statement of financial position
of CONDESSA CO. on December 31, 2016.

Preference share capital, 8%, P100 par (200,000 shares authorized,

60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share premium 3,750,000
Retained earnings 3,500,000
Total P16,250,000

During 2017, Condessa took part in the following transactions concerning equity.

1. Paid the annual 2016 P8 per share dividend on preference shares and a P2 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2016.

2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.

3. Reissued 21,000 treasury shares for land valued at P900,000.

4. Issued 15,000 preference shares at P105 per share.

5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are
selling for P45 per share.
6. Issued the stock dividend.

7. Declared the annual 2017 P8 per share dividend on preference shares and the P2 per
share dividend on ordinary shares. These dividends are payable in 2018.

8. Reported net income of P9,900,000 for the current year.

39. What is the retained earnings balance (before appropriation for treasury shares) on
December 31, 2017?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000

40. What amount should be reported as total shareholders’ equity on December 31, 2017?
A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000

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PROBLEM NO. 8

The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents
certain types of air pollution. Caboom does not manufacture or sell the products and processes
it develops; it conducts research and develops products which it patents, and then assigns the
patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Date Activity Cost
2007-2008 Research conducted to develop device P1,259,100
Jan. 2009 Design and construction of a prototype 262,800
Mar. 2010 Testing of models 126,000
Jan. 2010 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2011 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2013 Research aimed at modifying the design of the patented device 129,000
May 2017 Legal fees paid in a successful patent infringement suit against a
competitor 102,000
Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2015, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year
if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2017.
Compute the carrying value of Patent No. 112170 on each of the following dates:

41. December 31, 2010

A. P180,675 B. P186,150 C. P293,788 D. P175,200
42. December 31, 2014
A. P223,200 B. P52,560 C. P131,400 D. P122,640
43. December 31, 2017
A. P120,560 B. P78,840 C. P52,560 D. P98,550

BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2016.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of P4,000,000 when
Valenzuela sold it to Bartolo.
 During 2017, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2017 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
 The following research and development costs were incurred by Bartolo in 2017:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000

Bartolo estimates that these costs will be recouped by December 31, 2020. The materials
and equipment purchased have no alternative uses.
 On January 1, 2017, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2016 is only 5 years from January 1,
2017.
44. What is the total carrying value of Bartolo’s intangible assets on December 31, 2017?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
45. What is the total amount of charges against income for 2017?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

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PROBLEM NO. 9

The following are two (2) unrelated situations.

1. The December 31 year-end financial statements of SAMOA COMPANY contained the

following errors:
Dec. 31, 2016 Dec. 31, 2017
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2016 covering the years 2016, 2017, and
2018. The entire amount was charged to expense in 2016. In addition, on December 31,
2017, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded
until 2018. There were no other errors during 2016 and 2017, and no corrections have been
made for any of the errors. Ignore income tax effects.

46. What is the total effect of the errors on Samoa’s 2016 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement

47. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2017?
A. P75,500 overstatement
B. P40,500 overstatement
C. P225,500 understatement
D. P144,500 understatement

48. What is the total effect of the errors on the balance of Samoa’s retained earnings at
December 31, 2017?
A. P156,000 understatement
B. P87,000 overstatement
C. P133,000 understatement
D. P85,000 understatement

2. CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended
December 31, 2016 and 2017, respectively. However, the auditor noted that the following
errors had been made:

a. Sales for 2016 included amounts of P191,000 which had been received in cash during 2016,
but for which the related goods were shipped in 2017. Title did not pass to the buyer until
2017.

b. The inventory on December 31, 2016 was understated by P43,200.

c. The company’s accountant, in recording interest expense for both 2016 and 2017 on bonds
payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2016, to yield an effective 7% rate.

d. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2016 and 2017. Repairs of P42,500 and P47,000 had been incurred in 2016 and
2017, respectively. In determining depreciation charges, Chile applies a rate of 10% to the
balance in the Equipment account at the end of the year.

49. What is the corrected pretax income for 2016?

A. P303,200 B. P225,300 C. P311,700 D. P307,450

50. What is the corrected pretax income for 2017?

A. P480,042 B. P484,292 C. P575,392 D. P488,992

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PROBLEM NO. 10

The following are two (2) unrelated situations.

OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged
a deposit for each container delivered and receives a refund for each container returned within
two years after the year of delivery. Omega accounts for the containers not returned within the
time limit as being sold at the deposit amount. Information for 2017 is as follows:

Containers held by customers at

December 31, 2016,
from deliveries in: 2015 85,000
2016 240,000 325,000
Containers delivered in 2017 430,000
Containers returned in 2017
from deliveries in: 2015 57,500
2016 140,000
2017 157,000 354,500

51. How much revenue from container sales should be recognized for 2017?
A. P127,500 B. P267,500 C. P27,500 D. P85,000

52. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2017?
A. P373,000 B. P400,500 C. P267,500 D. P430,000

DP, INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract for
P810 that requires the company to provide periodic maintenance services and to replace
defective parts. During 2017, DP sold 300 washing machines and 270 warranty contracts for
cash. The company estimates that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2017. DP’s policy is to recognize income from the
warranties on a straight-line basis. In 2018, DP incurred actual costs relative to 2017 warranty
sales of P18,000 for parts and P36,000 for labor.

53. What liability relative to these transactions would appear on the December 31, 2017,
statement of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P0 P218,700

54. What amount of warranty expense would be reported for 2017?

A. P18,000 B. P 0 C. P 36,000 D. P54,000

55. What liability relative to the 2017 warranties would be reported on December 31, 2018,
and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0

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PROBLEM NO. 11

The TGR Company commenced operations on January 1, 2013. The company’s machinery
account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2013 Purchase P157,200
120,000
132,000 P409,200
Sept. 30, 2013 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2013 Freight and installation 6,000 487,200
Dec. 31, 2013 Depreciation P97,440 389,760
2014 Installment payments for acquisition
on Sept. 30, 2013 144,000 533,760
June 30, 2014 Purchase 240,000 773,760
Dec. 31, 2014 Depreciation 154,752 619,008
June 30, 2015 Acquisition – trade in of old machine 150,000 769,008
Dec. 31, 2015 Depreciation 153,802 615,206
Jan. 1, 2016 Sale 71,250 543,956
Dec. 31, 2016 Depreciation 108,791 435,165
Oct. 1, 2017 Sale 24,000 411,165
Dec. 31, 2017 Depreciation 82,233 328,932

a) On September 30, 2013, a machine was purchased on an installment basis. The list price
was P180,000, but 12 payments of P18,000 each were made by the company. Only the
monthly payments were recorded in the machinery account starting with September 30,
2013. Freight and installation charges of P6,000 were paid and charged to the machinery
account on October 3, 2013.

b) On June 30, 2015, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2014.

c) On June 30, 2015, the machine acquired for P157,200 was traded for a larger one having a
list price of P279,000. Allowance of P129,000 was received on the old machine, the balance
of the list price being paid in cash and charged to the machinery account.

d) On January 1, 2016, the machine acquired on January 1, 2013 with cost of P132,000 was
sold for P75,000. The cost of removal and crating totaled P3,750.

e) On October 1, 2017, the machine purchased on January 1, 2013 was sold for P24,000 cash.

Assume a 5-year useful life for TGR Company’s machinery.

56. What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2013?
A. P50,400 B. P40,200 C. P36,450 D. P86,850

57. What is the adjusted balance of the Machinery account on December 31, 2017?
A. P694,200 B. P705,000 C. P700,200 D. P703,950

58. What is the adjusted balance of the Accumulated depreciation on December 31, 2017?
A. P465,600 B. P457,140 C. P462,240 D. P397,740

59. What is the correct total depreciation provision for the years 2013-2017?
A. P737,400 B. P734,040 C. P728,940 D. P669,540

60. The entry to correct the depreciation provision for the years 2013-2017 should include a
debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249

-END-
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SOLUTION - AUDITING PROBLEMS TEST BANK 1

PROBLEM 1 – TANYING CORP.

1. B Sales (P1,353,000 + P10,500 Freight) P1,363,500

Sales returns and allowances (11,700)
Sales discounts (2,640)
Net sales P1,349,160

2. C Inventory, Jan. 1 P269,100

Purchases P424,800
Purchase returns and allowances (P424,800 x 6%) (25,488)
Freight in (P16,575 + P1,710) 18,285 417,597
Cost of goods available for sale P686,697

3. D Inventory, Dec. 31, 2017

Per books P 61,650
Goods out on consignment 55,800
Per audit P117,450

4. C Distribution costs:
Sales salaries and commissions (P75,000 + [P9,180 x 3%]) P75,275
Advertising expense (P48,270 + [P5,454 x 2/6]) 50,088
Depreciation expense – Sales/delivery equipment (P18,300 + [P23,400 x 10% x 10/12]) 20,250
Freight expense 10,500
Travel expense – sales representatives 13,680
Miscellaneous selling expenses 8,220
Total P178,013

5. B Administrative expenses:
Legal services P 6,675
Insurance and licenses 23,040
Depreciation expense – office equipment 12,600
Utilities 19,200
Telephone and postage 4,425
Office supplies expense (P6,540 – P3,675) 2,865
Officers’ salaries 109,800
Doubtful accounts expense (P783,000 x 2% = P15,660 – P480) 15,180
Total P193,785

6. A Allowance for doubtful accounts (P783,000 x 2%) P15,660

7. D Net sales P1,349,160

Cost of goods sold (P686,697 – P117,450) (569,247)
Gross income 779,913
Interest revenue (P1,650 + P1,680) 3,330
Dividend revenue 15,450
Gain on sale of assets 23,460
Total income P822,153

8. C Total income P822,153

Distribution costs (178,013)
Administrative expenses (193,785)
Interest expense (13,560)
Loss on sale of equipment (217,800)
Income from continuing operations before tax P218,995

9. B Office supplies inventory P3,675

10. A Income before tax P218,995

Income tax (P218,995 x 30) (65,669)
Income from continuing operations 153,296
Income from discontinued operations, net of tax (P120,000 x 70%) 84,000
Net income P237,296

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PROBLEM 2 – BUNCHING COMPANY

Accounts Accounts
Cash Receivable Inventory Payable
Per books P963,200 P2,254,000 P6,050,000 P4,201,000
AJE 1 (654,600) 310,000 --- ---
2 360,000 --- --- 372,400
3 a --- --- --- (175,000)
b --- --- 130,000 ---
c --- --- (637,500) ---
d --- --- 217,500 217,500
e --- --- 275,000 ---
Per audit P668,600 P2,564,000 P6,035,000 P4,615,900

(11 – C) (12 – B) (13 – A) (14 – B)

AJES
1. Sales 360,100
Accounts receivable (P294,500 / 95%) 310,000
Sales discounts (P310,000 x 5%) 15,500
Cash 654,600
2. Cash (P372,400 – P12,400) 360,000
Purchase discounts 12,400
Accounts payable 372,400
3. a Accounts payable 175,000
Purchases 175,000
b Inventory 130,000
Cost of sales 130,000
c Cost of sales 637,500
Inventory 637,500
d Purchases 217,500
Accounts payable 217,500
Inventory 217,500
Cost of sales 217,500
e Inventory 275,000
Cost of sales 275,000
f No adjusting entry

15. C Current ratio:

Current assets:
Cash P 668,600
Accounts receivable 2,564,000
Inventory 6,035,000 P9,267,600
Current liabilities:
Accounts payable P4,615,900
Accrued expenses 431,000 5,046,900
1.84

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PROBLEM 3 – PAKO COMPANY

16. D Balance, Jan. 1 P1,800,000

June 30 acquisition (P1,080,000 + P48,000) 1,128,000
Sept. 30 sale (150,000)
Dec. 1 trade in: old machine (90,000)
new machine 270,000
Balance, Dec. 31 P2,958,000

17. A Remainder of beginning balance (P1,800,000 – P150,000 – P90,000 =

P1,560,000 x 10%) P156,000
June 30 acquisition (P1,128,000 x 10% x 6/12) 56,400
Sept. 30 sale (P150,000 x 10% x 9/12) 11,250
Dec. 1 trade in: old machine (P90,000 x 10% x 11/12) 8,250
new machine (P270,000 x 10% x 1/12) 2,250
Depreciation expense for 2015 P234,150

GENLUNA COPPERMINES, INC.

18. C Depletion rate per ton (P14,580,000 / 1,620,000) P9

Copper ore mined in 2017 (15,000 x 6 months) x 90,000
Depletion for 2017 P 810,000
Depletion per books 1,215,000
Overstatement of depletion expense P405,000

19. D Depreciable cost of machinery (P1,800,000 x 90%) P1,620,000

Estimated copper ore reserve 1,620,000
Depreciation rate per ton P1
Copper ore mined in 2017 90,000
Depreciation expense for 2017 P 90,000
Depreciation per books 120,000
Overstatement of depreciation expense P 30,000

20. D January 1, 2014

Total cost of machine (P300,000 + P3,000 + P12,000) P315,000
Residual value (12,000)
Depreciable cost P303,000
Estimated useful life 10 years
Annual depreciation P30,300
Depreciable cost P303,000
Depreciation, 2016 – 2014 (P30,300 x 3 years) (90,000)
Remaining depreciable cost, Jan. 1, 2017 P212,100
Cost of new parts 37,800
Total P249,900
Remaining useful life (10 years – 3 years) 7 years
Revised annual depreciation P35,700

PROBLEM 4 – HARLINGTON COMPANY

21. A Net income before trading security adjustment P2,700,000

Unrealized loss (P3,465,000 cost – P3,195,000 market value) (270,000)
Net income, as adjusted P2,430,000

22. B Net income before trading security adjustment P2,700,000

Unrealized gain (P3,465,000 cost – P3,564,000 market value) 99,000
Net income, as adjusted P2,799,000

LABADA CO.

23. D Carrying Value Market Value

Ganda Co. P1,710,000 P1,759,500
Waston, Inc. (P135 x 1,800) 243,000 229,500
P1,953,000 P1,989,000
Unrealized gain (P1,989,000 – P1,953,000) P36,000
24. C Net proceeds (P93 x 15,000 = P1,395,000 – P13,500) P1,381,500
Carrying value (1,251,000)
Gain on sale P 130,500
25. B Trading securities at fair value P1,989,000

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PROBLEM 5 – SAMSON MFG. CO.

26. C Actual borrowing cost:

Specific borrowing (P5 million x 10%) P500,000
General borrowings:
P25 million x 8% P2,000,000
P15 million x 6% 900,000 2,900,000
Total P3,400,000
Capitalization rate (P2,900,000/P40 million) 7.25%
Average expenditures – 2016 P7,250,000
Capitalizable interest – 2016:
Specific borrowing (P5 million x 10%) P500,000
General borrowings (P7,250,000 – P5,000,000 = P2,250,000 x 7.25%) 163,125
Total P663,125

27. B Average expenditures – 2017 P16,163,125

Capitalizable interest – 2017:
Specific borrowing (P5 million 10% x 6/12) P250,000
General borrowings (P16,163,125 – P5,000,000 = P11,163,125 x 7.25% x 6/12) 404,663
Total P654,663

28. A 2014 interest expense (P3,400,000 – P663,125) P2,736,875

29. D 2015 interest expense (P3,400,000 – P654,663) P2,745,337

30. B Accumulated expenditures before interest P19,500,000

Interest capitalized in 2016 and 2017 (P663,125 + P654,663) 1,317,788
Total cost of building P20,817,788

PROBLEM 6
Compensation Cumulative
Expense Compensation
Year Calculation for Period Expense
1 30,000 options x P5 fair value x P 50,000 P 50,000
2 30,000 options x P5 fair value x 50,000 100,000
3 30,000 options x P5 fair value x 50,000 150,000

31. C 32. C 33. D 34. D 35. D

PROBLEM 7 – BRANDY CO.

36. C Ordinary shares issued and outstanding 72,000

Ordinary shares subscribed 72,000
Total 144,000
Ordinary shares issued to acquire land (24,000)
Ordinary shares originally subscribed 120,000
Par value/share x P10
Total par value P1,200,000
Share premium (P2,850,000 – P450,000) 2,400,000
Total subscription price P3,600,000
* P690,000 FV of land – P240,000 PV

37. D Subscription of 12,000 preference shares @ P120/share P1,440,000

Subscription of 60,000 preference shares @ P100/share 6,000,000
Total 7,440,000
Year-end balance of subscriptions receivable – preference (360,000)
Amount collected from subscribers P7,080,000

38. B Preference Ordinary

Issued P6,600,000 P 720,000
Subscribed 600,000 720,000
Share premium 240,000 2,850,000
Subscriptions receivable (360,000) (1,080,000)
Contributed capital P7,080,000 P3,210,000

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CONDESSA CO.

1. Dividends payable – preference (P8 x 60,000) 480,000

Dividends payable – ordinary (P2 x 600,000) 1,200,000
Cash 1,680,000

2. Treasury shares 3,240,000

Cash (P40 x 81,000) 3,240,000

3. Land 900,000
Treasury shares (P40 x 21,000) 840,000
Share premium – treasury 60,000

4. Cash (P105 x 15,000) 1,575,000

Preference share capital (P100 x 15,000) 1,500,000
Share premium – preference 75,000

5. Retained earnings (P45 x 54,000*) 2,430,000

Stock dividends payable (P5 x 54,000) 270,000
Share premium – ordinary 2,160,000
* 600,000 – 60,000 treasury shares = 540,000 x 10%

6. Stock dividends payable 270,000

Ordinary share capital 270,000

7. Retained earnings 1,788,000

Dividends payable – preference (P8 x 75,000) 600,000
Dividends payable – ordinary (P2 x 594,000*) 1,188,000
* 540,000 + 54,000

8. Income summary 9,900,000

Retained earnings 9,900,000

Preference share capital (P6,000,000 + P1,500,000) P7,500,000

Ordinary share capital (P3,000,000 + P270,000) 3,270,000
Share premium (P3,750,000 + P60,000 + P75,000 + P2,160,000) 6,045,000
Retained earnings (P3,500,000 – P2,430,000 – P1,788,000 + P9,900,000) (39 – A) 9,182,000
Treasury shares (P3,240,000 – P840,000) (2,400,000)
Total (40 – B) P23,597,000

PROBLEM 8 – CABOOM LABORATORIES

41. D Cost to obtain patent (January 2010) P186,150

2010 amortization (P186,150/17) (10,950)
Carrying value, Dec. 31, 2010 P175,200

42. C Carrying value, Jan. 1, 2011 P175,200

Amortization, 2011-2014 (P10,950 x 4 years) (43,800)
Carrying value, Dec. 31, 2014 P131,400

43. C Carrying value, Jan. 1, 2015 P131,400

Amortization, 2015-2017 (P131,400 x 3/5) (78,840)
Carrying value, Dec. 31, 2017 P 52,560

BARTOLO COMPANY

44. A Cost of patent purchased on Jan. 1, 2016 P4,000,000

2016 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2016 3,600,000
2017 amortization (P3,600,000/5) (720,000) P2,880,000
Cost of franchise P960,000
2017 amortization (P960,000/10) (96,000) 864,000
Total carrying value of intangibles P3,744,000

45. B Amortization of patent – 2017 P720,000

Amortization of franchise – 2017 96,000
Payment to Delco (P5,000,000 x 5%) 250,000
Research and development costs 866,000
Total charges against 2017 income P1,932,000

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PROBLEM NO. 9 – SAMOA COMPANY/CHILE CO.

46. A Over- (Under-)statement

Understatement of 2016 ending inventory P 48,000
Overstatement of 2017 ending inventory 40,500
Prepaid insurance charged to expense in 2016 (P330,000 ÷ 3) 110,000
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect of errors on net income P123,500
47. D Over- (Under-)statement
Overstatement of 2017 ending inventory P 40,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on working capital (P144,500)
48. C Over- (Under-)statement
Overstatement of 2017 ending inventory P 40,500
Understatement of depreciation expense in 2016 11,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on retained earnings (P133,000)
2016 2017
Pretax income P505,000 P387,000
Sales revenue erroneously recognized in 2016 (191,000) 191,000
Understatement of 2016 ending inventory 43,200 (43,200)
Understatement of bond interest expense (1) (7,250) (7,758)
Ordinary repairs erroneously capitalized (42,500) (47,000)
Overstatement of depreciation (2) 4,250 8,950
Corrected pretax income P311,700 P488,992
(1)
Book Value Nominal Effective Discount
Year of Bonds Interest Interest Amortization
2016 P1,175,000 P75,000 P82,250 P7,250
2017 1,182,250 75,000 82,758 7,758
(2)

2016 (P42,500 ÷ 10) P4,250

2017 (P42,500 ÷ 10) P4,250
(P47,000 ÷ 10) 4,700 P8,950

49. C 50. D

PROBLEM NO. 10 – OMEGA COMPANY/DP, INC.

51. C Containers held by customers at Dec. 31, 2016 from deliveries in 2015 P85,000
Containers returned in 2017 from deliveries in 2015 (57,500)
Revenue from container sales P27,500

52. A Liability for returnable containers, Dec. 31, 2016 P325,000

Deliveries in 2017 430,000
Total 755,000
2017 container returns P354,500
2017 container sales 27,500 (382,000)
Liability for returnable containers P373,000

53. C Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 2/3) P145,800

54. D Parts P18,000

Labor 36,000
Total warranty expense P54,000

55. B Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 1/3) P72,900

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PROBLEM 11 – TGR Company

56. D Trade-in – June 30, 2015

Cost P157,200
Accum. depreciation, 1/1/13 – 6/30/15 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50,400
Sale – Jan. 1, 2016
Cost P132,000
Accum. depreciation, 1/1/13 – 1/1/16 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2017
Cost P120,000
Accum. depreciation, 1/1/13 – 10/1/17 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

57. C Machine acquired on Sept. 30, 2013 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2014 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2016 (list price) 279,000
Total P700,200

58. C Machine acquired on:

Sept. 30, 2013 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2014 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2015 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2017 P462,240

59. B
Date of
Acquisition Cost 2013 2014 2015 2016 2017 Total
1/1/2013 P157,200 P31,440 P31,440 P15,720 P0 P0 P 78,600
120,000 24,000 24,000 24,000 24,000 18,000 114,000
132,000 26,400 26,400 26,400 0 0 79,200
9/30/2013 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/2014 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/2015 279,000 0 0 27,900 55,800 55,800 139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040 P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233 597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)

60. A Depreciation expense (2017) 75,807

Retained earnings (2013 – 2016) 61,215
Accumulated depreciation 137,022

---END---

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AUDITING PROBLEMS TEST BANK 2

PROBLEM NO. 1

You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2017. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the company’s
statement of financial position and statement of income as of and for the year ended December
31, 2017. Audit findings are as follows:

I. AUDIT OF CASH

A cash count was conducted by your staff on January 7, 2018. The petty cash fund of
P60,000 maintained by the company on an imprest basis relected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2018.

You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000

Your review of the reconciliation statement disclosed the following:

1. Postdated checks totaling P107,400 were included as part of the deposit in transit.
These represent collections from various customers whose accounts have been
outstanding for less than three months. These checks were actually deposited on
January 8, 2018.

2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2017 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2018.

3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2017. This was not recorded
as of year-end.

4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.

5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is the company’s policy to provide allowance for doubtful accounts as follows:

Less than 3 months P2,500,960 1%

3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660
An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.

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III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:

Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180
The securities are listed in the stock exchange. The company follows the fair value
accounting.

IV. AUDIT OF NOTES RECEIVABLE

The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.

This is covered by a promissory note with interest at 15% per annum dated November 1,
2017. No interest has been accrued on the note as of December 31, 2017.

V. AUDIT OF PREPAYMENTS

Prepaid expenses account consists of the following:

Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion
as well as the regular advertisement of its products. It paid a total of P640,000, P100,000
of which is for the Christmas promotion while the balance is for the regular promotion and
which will run for one year starting on August 1, 2017. Payment was made on July 20,
2017, and the total amount was reflected as prepaid advertising.

The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2017, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2017. Rental
deposit remained at three months and is included under other assets.

The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1,
2018. No adjustment has been made as of December 31, 2017.

To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2017 and included the same in their office supplies inventory. As at year-end,
unused office supplies amount to P102,500.

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VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on December 29

and 20, 2017. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 have not been invoiced and recorded as of
year-end. These items had a selling price of P146,940 with term of 15 days. The
corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the
inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January
4, 2018. The goods were shipped by the supplier on December 28, FOB shipping point.

VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT

The company purchased additional equipment worth P268,000 on June 30, 2017. At the
date of purchase, it incurred the following additional costs which were charged to repairs
and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original
cost.

The company discarded some store equipment on October 1, 2017, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 on December 31, 2017. Depreciation booked from October 1,
2017 to year-end was P10,480. No entry was made on the disposal of the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2017 were recorded when paid in January 2018 which
included the following:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2017. Accrued interest on this loan was
not taken up at year-end.

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X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2017, payable on January 31, 2018.

Ayala Merchants Corporation

UNADJUSTED TRIAL BALANCE
December 31, 2017

Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880

Determine the adjusted balances of the following: (Ignore tax implications)

1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850

3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700

4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140

5. Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217

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6. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750

9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000

10. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000

11. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

12. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

13. Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

14. Accumulated depreciation

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

15. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

16. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644

17. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

19. Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

20. Operating expenses

A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

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PROBLEM NO. 2

To substantiate the existence of the accounts receivable balances as at December 31, 2017 of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross
profit on sales is 20%. The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2017. Correct balance as is P60,000. received December 31, 2017.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2017 cancels this. Lukas Company in 2018.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping point.
2018. Shipped in 2017.
Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

21. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

22. The effect on 2017 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.

23. The overstatement of receivable from Lazaro is

A. P96,000 B. P24,000 C. P72,000 D. P48,000

24. The accounts receivable from Silang is

A. Correctly stated. C. P112,500 under.
B. P112,500 over. D. P225,000 under.

25. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000

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PROBLEM NO. 3

Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile,
Inc. for the year ending December 31, 2017. 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.

The following questions related to test of controls of the production cycle:

26. 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.

27. Which of the following internal control activities most likely addresses the completeness
assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary inventory
records.
B. Employees responsible for custody of finished goods do not perform the receiving
function
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and inventory
accounting personnel.

28. From the auditor’s point of view, inventory counts are more acceptable prior to the year-
end when
A. Internal control is weak.
B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.

29. A retailer’s physical count of inventory was higher than that shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.

30. An auditor will usually trace the details of the test counts made during the observation of
physical inventory counts to a final inventory compilation. This audit procedure is
undertaken to provide evidence that items physically present and observed by the auditor
at the time of the physical inventory count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory schedule.
D. Included in the final inventory schedule.

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PROBLEM NO. 4

A portion of the SPARK COMPANY’s statement of financial position appears as follows:

December 31, 2017 December 31, 2016

Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2017, cash totaling P471,700 was paid on accounts payable. Operating expenses for
2017 totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing
1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was
P32.60 during January 2017 and increased P0.10 per month during the year. Spark sells only
one product. All sales are made for P50 per unit. The ending inventory for 2016 was valued at
P32.50 per unit.

31. Number of units sold during 2017

A. 7,066 B. 18,400 C. 4,268 D. 13,400

32. Accounts payable balance at December 31, 2017

A. P190,100 B. P50,000 C. P199,100 D. P200,000

33. Inventory quantity on December 31, 2017

A. 5,750 B. 2,750 C. 17,084 D. 10,750

34. Cost of inventory on December 31, 2017

A. P187,450 B. P186,875 C. P192,950 D. P189,660

35. Cost of goods sold for the year ended December 31, 2017
A. P609,125 B. P609,700 C. P606,915 D. P603,625

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PROBLEM NO. 5

A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested

by your auditor soon after December 31, 2017, showing the additions, retirements,
depreciation, and other data affecting the income of the company in the 4-year period 2014 to
2017, inclusive.

The following data were ascertained.

Balance of Trucks account, Jan. 1, 2014
Truck No. 1 purchased Jan. 1, 2011, cost P180,000
Truck No. 2 purchased July 1, 2011, cost 220,000
Truck No. 3 purchased Jan. 1, 2013, cost 300,000
Truck No. 4 purchased July 1, 2013, cost 240,000
Balance, Jan. 1, 2014 P940,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2014, and

entered in the ledger, had a balance on that date of P302,000 (depreciation on the four trucks
from the respective dates of purchase, based on a 5-year life, no salvage value). No charges
had been made against the account before January 1, 2014.

Transactions between January 1, 2014, and December 31, 2017, which were recorded in the
ledger, are as follows.

July 1, 2014 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of
which was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash
on the transaction. The entry was a debit to Trucks and a credit to Cash,
P220,000. The transaction has commercial substance.

Jan. 1, 2015 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.

July 1, 2016 A new truck (No. 6) was acquired for P420,000 cash and was charged at that
amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2016 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk
for P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company.
The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.

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Entries for depreciation had been made at the close of each year as follows: 2014, P210,000;
2015, P225,000; 2016, P250,500; 2017, P304,000.

36. What is the total depreciation expense for the year ended December 31, 2014?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

37. What is the gain (loss) on trade in of Truck #3 on July 1, 2014?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

38. What is the net book value of the Trucks on December 31, 2017?
A. P414,000 B. P348,000 C. P228,500 D. P894,000

39. The total depreciation expense recorded for the 4-year period (2014-2017) is overstated
by
A. P185,500 B. P265,500 C. P287,500 D. P275,500

40. The books have not been closed for 2017. What is the compound journal entry on
December 31, 2017 to correct the company’s errors for the 4-year period (2014-2017)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500

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PROBLEM NO. 6

The cash account of NUNAL COMPANY shows the following activities:

Date Debit Credit Balance

Nov. 30 Balance P345,000
Dec. 2 November bank charges P 150 344,850
4 November bank credit for notes
receivable collected P 30,000 374,850
15 NSF check 3,900 370,950
20 Loan proceeds 145,500 516,450
21 December bank charges 180 516,270
31 Cash receipts book 2,121,900 2,638,170
31 Cash disbursements book 1,224,000 1,414,170

CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000

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BANK STATEMENT
Date Check Charges Credits
Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900

Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810

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Based on the preceding information, determine the following:

41. Outstanding checks at November 30

A. P39,150 B. P28,650 C. P21,150 D. P46,650

42. Outstanding checks at December 31

A. P459,000 B. P477,000 C. P441,000 D. P487,650

43. Deposit in transit at November 30

A. P58,500 B. P145,500 C. P 0 D. P25,500

44. Deposit in transit at December 31

A. P114,000 B. P139,500 C. P132,000 D. P 0

45. Adjusted book balance at November 30

A. P410,850 B. P345,000 C. P375,000 D. P374,850

46. Adjusted bank receipts for the month of December

A. P2,297,400 B. P2,291,400 C. P2,303,400 D. P2,321,400

47. Adjusted book disbursements for the month of December

A. P1,228,440 B. P1,246,440 C. P1,210,440 D. P1,246,620

48. Adjusted bank balance at December 31

A. P1,449,810 B. P1,674,810 C. P1,431,810 D. P1,776,810

49. Unadjusted bank balance at November 30

A. P555,060 B. P94,560 C. P1,776,810 D. P342,000

50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
C. Interbank transfer schedule.
D. Bank deposit lead schedule.

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PROBLEM NO. 7

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.

51. 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

52. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

53. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

54. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

55. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000

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PROBLEM NO. 8

The HVR Company included the following in its notes receivable on December 31, 2017:

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

The following transactions during 2017 and other information relate to the company’s notes
receceivable:

a) On January 1, 2017, 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,
2018. There was no established exchange price for the land. The prevailing interest rate
for this note on January 1, 2017 was 10%.

b) On January 1, 2017, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2019, 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, 2017.

c) On January 1, 2017, 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, 2017. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January 1,
2017.

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

56. What amount of consultation fee revenue should be recognized in 2017?

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

57. What amount should be reported as gain on sale of equipment?

A. P994,800 B. P2,400,000 C. P1,162,700 D. P1,237,300

58. The amount to be reported as noncurrent notes receivable on December 31, 2017 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600

59. The amount to be reported as current notes receivable on December 31, 2017 is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000

60. How much interest income should be recognized in 2017?

A. P974,200 B. P756,000 C. P1,378,700 D. P1,160,500

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Audit of Inventories Problems and Solutions

Bachelor of Science in Accountancy (Ateneo de Naga University)

StuDocu is not sponsored or endorsed by any college or university

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Page 1 of 9

CEBU CPAR CENTER

Mandaue CIty
AUDITING PROBLEMS
AUDIT OF INVENTORIES
PROBLEM NO. 1
The Pasay Company is a wholesale distributor of automobile replacement parts. Initial
amounts taken from Pasay’s accounting records are as follows:
Inventory at December 31, 2005 (based on
physical count on December 31, 2005) P400,000

Accounts payable at December 31, 2005:

Vendor Terms Amount
Anito Company Net 30 P 9,000
Victoria Company Net 30 36,500
Winston Company Net 30 48,000
Sogo Company Net 30 74,000
Rotonda Company Net 30 -
P167,500

Sales in 2005 P5,000,000

Additional information follows:
1. Parts held on consignment from Anito to Pasay amounting to P9,000, were included
in the physical count of goods in Pasay’s warehouse on December 31, 2005, and in
accounts payable at December 31, 2005.
2. P15,000 worth of parts which were purchased from Sogo and paid for in December
2005 were sold in the last week of 2005 and appropriately recorded as sales of
P21,000. The parts were included in the physical count on December 31, 2005,
because the parts were on the loading dock waiting to be picked up by the customer.
3. Parts in transit on December 31, 2005, to customers, shipped FOB destination,
December 28, 2005, amounted to P11,000. The customers received the parts on
January 6, 2006. Sales of P15,000 to the customers for the parts were recorded by
Pasay on January 2, 2006.
4. Retailers were holding P50,000, at cost, of goods on consignment from Pasay, at
their stores on December 31, 2005.
5. Goods were in transit from Rotonda to Pasay on December 31, 2005. The cost was
P8,000 and these were shipped FOB shipping point on December 29, 2005.
REQUIRED:
Determine the adjusted balances of Inventory and Accounts Payable as of December 31,
2005 and Sales for the year 2005.

PROBLEM NO. 2
You were engaged by Quezon Corporation for the audit of the company’s financial
statements for the year ended December 31, 2005. The company is engaged in the
wholesale business and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

AP-5905
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Page 2 of 9

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P5,200,000 Balance forwarded P2,800,000
Dec. 27 SI No. 965 40,000 Dec. 28 RR No. 1059 24,000
Dec. 28 SI No. 966 150,000 Dec. 30 RR No. 1061 70,000
Dec. 28 SI No. 967 10,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 969 46,000 Dec. 31 RR No. 1063 64,000
Dec. 31 SI No. 970 68,000 Dec. 31 Closing entry (3,000,000)
Dec. 31 SI No. 971 16,000 P -
Dec. 31 Closing entry (5,530,000)
P -
Note: SI = Sales Invoice RR = Receiving Report
Accounts receivable P500,000
Inventory 600,000
Accounts payable 400,000
You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the
last Receiving Report which had been used was No. 1063 and that no shipments had been
made on any Sales Invoices whose number is larger than No. 968. You also obtained the
following additional information:
a) Included in the warehouse physical inventory at December 31 were goods which
had been purchased and received on Receiving Report No. 1060 but for which the
invoice was not received until the following year. Cost was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. CPA 123 was unloaded on January 2 of the following year and received
on Receiving Report No. 1063. The freight was paid by the vendor.
 Truck No. ILU 143 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P100,000 per Sales Invoice No.
968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks
enroute to Brooks Trading Corporation. Brooks received the goods, which were
sold on Sales Invoice No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received
on Receiving Report No. 1064. The goods were shipped FOB Destination, and
freight of P2,000 was paid by the client. However, the freight was deducted from
the purchase price of P800,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2005
a. P5,250,000 b. P5,400,000 c. P5,150,000 d. P5,350,000
2. Purchases for the year ended December 31, 2005
a. P3,000,000 b. P3,018,000 c. P3,754,000 d. P3,818,000
3. Inventory as of December 31, 2005
a. P864,000 b. P968,000 c. P800,000 d. P814,000
4. Accounts receivable as of December 31, 2005
a. P350,000 b. P370,000 c. P220,000 d. P120,000
5. Accounts payable as of December 31, 2005

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a. P418,000 b. P400,000 c. P354,000 d. P1,218,000

PROBLEM NO. 3
Makati Company is preparing its 2005 financial statements. Prior to any adjustments,
inventory is valued at P1,605,000. During your audit, you found the following information
relating to certain inventory transactions from your cutoff test.
a. Goods valued at P110,000 are on consignment with a customer. These goods were
not included in the ending inventory figure.
b. Goods costing P87,000 were received from a vendor on January 5, 2006. The
related invoice was received and recorded on January 12, 2006. The goods were
shipped on December 31, 2005, terms FOB shipping point.
c. Goods costing P85,000, sold for P102,000, were shipped on December 31, 2005,
and were delivered to the customer on January 2, 2006. The terms of the invoice
were FOB shipping point. The goods were included in the ending inventory for 2005
and the sale was recorded in 2006.
d. A P35,000 shipment of goods to a customer on December 31, terms FOB destination
was not included in the year-end inventory. The goods cost P26,000 and were
delivered to the customer on January 8, 2006. The sale was properly recorded in
2006.
e. The invoice for goods costing P35,000 was received and recorded as a purchase on
December 31, 2005. The related goods, shipped FOB destination were received on
January 2, 2006, and thus were not included in the physical inventory.
f. Goods valued at P154,000 are on consignment from a vendor. These goods are not
included in the physical inventory.
g. A P60,000 shipment of goods to a customer on December 30, 2005, terms FOB
destination, was recorded as a sale in 2006. The goods, costing P37,000 and
delivered to the customer on January 6, 2006, were not included in the 2005 ending
inventory.
REQUIRED:
1. Compute the proper inventory amount to be reported on Makati’s balance sheet for
the year ended December 31, 2005.
2. By how much would the net income have been misstated if no adjustments were
made for the above transactions? (Disregard tax implications)

PROBLEM NO. 4
You were engaged to perform an audit of the accounts of the Manila Company for the
year ended December 31, 2005, and you observed the taking of the physical inventory of
the company on December 30, 2005. Only merchandise shipped by the company to
customers up to and including December 30, 2005 have been eliminated from inventory.
The inventory as determined by physical inventory count has been recorded on the books
by the company’s controller. No perpetual inventory records are maintained. All sales are
made on an FOB shipping point basis. You are to assume that all purchase invoices have
been correctly recorded. The inventory was recorded through the cost of sales method.
The following lists of sales invoices are entered in the sales books for the month of
December 2005 and January 2006, respectively.

DECEMBER 2005
Sales Sales Cost of
invoice amount invoice date merchandise sold Date shipped
a) P 150,000 Dec. 21 P 100,000 Dec. 31, 2005

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DECEMBER 2005
Sales Sales Cost of
invoice amount invoice date merchandise sold Date shipped
b) 100,000 Dec. 31 40,000 Nov. 03, 2005
c) 50,000 Dec. 29 30,000 Dec. 30, 2005
d) 200,000 Dec. 31 120,000 Jan. 03, 2006
e) 500,000 Dec. 30 280,000 Dec. 29, 2005
(shipped to consignee)

JANUARY 2006
Sales invoice Sales invoice Cost of merchandise Date shipped
amount date sold
f) P 300,000 Dec. 31 P 200,000 Dec. 30, 2005
g) 200,000 Jan. 02 115,000 Jan. 02, 2006
h) 400,000 Jan. 03 275,000 Dec. 31, 2005
REQUIRED:
Prepare the necessary adjusting entries at December 31, 2005.

PROBLEM NO. 5
The physical inventory of Taguig Company as of December 26, 2005 totaled P1,965,000.
You agreed on the December 26 count as the company has a good internal control
system. In trying to establish the December 31 inventory, you noted the following
transactions from December 27 to December 31, 2005.
Sales (20% markup on cost) P 600,000
Credit memos issued:
For goods returned on:
December 15 27,000
December 20 35,000
December 29 36,000
For goods delivered to customers not in
accordance with specifications 9,500
Credit memos received:
For goods returned on:
December 10 17,000
December 26 23,000
December 28 8,000
Purchases:
Placed in stock 120,000
In transit, FOB shipping point 50,000
In transit, FOB destination 33,000
REQUIRED:
Inventory as of December 31, 2005.

PROBLEM NO. 6
Mandaluyong Company is an importer and wholesaler. Its merchandise is purchased
from several suppliers and is warehoused until sold to customers.
In conducting an audit for the year ended December 31, 2005 the company’s CPA
determined that the system of internal control was good. Accordingly, the CPA observed
the physical inventory at an interim date, November 30, 2005 instead of at year end. The
following information was obtained from the general ledger:

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Inventory, January 1, 2005 P 1,312,500

Physical inventory, November 30, 2005 1,425,000
Sales for 11 months ended November 30, 2005 12,600,000
Sales for the year ended December 31, 2005 14,400,000
Purchases for 11 months ended November 30, 2005
(before audit adjustments) 10,125,000
Purchases for the year ended December 31, 2005
(before audit adjustments) 12,000,000

The CPA’s audit disclosed the following information:

a) Shipments received in November and included in the physical
inventory but recorded as December purchases. P 112,500
b) Shipments received in unsalable condition and excluded from
physical inventory. Credit memos had not been received nor
chargebacks to vendors been recorded:
Total at November 30, 2005 15,000
Total at December 31, 2005 (including the November
unrecorded chargebacks) 22,500
c) Deposit made with vendor and charged to purchases in October,
2005. Product was shipped in January, 2006. 30,000
d) Deposit made with vendor and charged to purchases in November,
2005. Product was shipped FOB destination, on November 29,
2005 and was included in November 30, 2005 physical inventory
as goods in transit. 82,500
e) Through the carelessness of the receiving department shipment in
early December 2005 was damaged by rain. This shipment was
later sold in the last week of December at cost. 150,000
REQUIRED:
1. Gross profit rate for 11 months ended November 30, 2005.
2. Cost of goods sold during the month of December 2005 using the gross profit
method.
3. December 31, 2005 inventory using the gross profit method.

PROBLEM NO. 7
On April 21, 2005, a fire damaged the office and warehouse of Muntinlupa Company.
The only accounting record saved was the general ledger, from which the trial balance
below was prepared.
Muntinlupa Company
Trial Balance
March 31, 2005
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, December 31, 2004 750,000
Land 350,000
Building 1,100,000
Accumulated depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Common stock, P100 par 1,000,000
Retained earnings 520,000

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DEBIT CREDIT
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000
The following data and information have been gathered:
a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed that
checks written during the period April 1 to 21 totaled P130,000: P57,000 paid to
accounts payable as of March 31, P34,000 for April merchandise purchases, and
P39,000 paid for other expenses. Deposits during the same period amounted to
P129,500, which consisted of receipts on account from customers with the exception
of a P9,500 refund from a vendor for merchandise returned in April.
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of
P106,000 for April merchandise purchases, including P23,000 for shipments in transit
on that date.
d. Customers acknowledged indebtedness of P360,000 at April 21, 2005. It was also
estimated that customers owed another P80,000 that will never be acknowledged or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.
e. The insurance company agreed that the fire loss claim should be based on the
assumption that the overall gross profit ratio for the past two years was in effect
during the current year. The company’s audited financial statements disclosed the
following information:
2004 2003
Net sales P 5,300,000 P 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000
f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of
the inventory was a total loss.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Receivable as of April 21, 2005?
a. P400,000 b. P360,000 c. P440,000 d. P354,000
2. How much is the sales for the period January 1 to April 21, 2005?
a. P1,430,000 b. P1,510,000 c. P1,519,500 d. P1,506,000
3. How much is the adjusted balance of Accounts Payable as of April 21, 2005?
a. P286,000 b. P237,000 c. P106,000 d. P343,000
4. How much is the net purchases for the period January 1 to April 21, 2005?
a. P650,500 b. P660,000 c. P673,500 d. P683,000
5. How much is the cost of sales for the period January 1 to April 21, 2005?
a. P786,500 b. P830,500 c. P835,725 d. P828,300
6. How much is the estimated inventory on April 21, 2005?
a. P570,000 b. P623,500 c. P587,775 d. P579,500
7. How much is the estimated inventory fire loss?
a. P579,500 b. P535,000 c. P477,000 d. P512,000

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PROBLEM NO. 8
The work-in-process inventories of Parañaque Company were completely destroyed by
fire on June 1, 2005. You were able to establish physical inventory figures as follows:
January 1, 2005 June 1, 2005
Raw materials P60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000
Sales from January 1 to May 31, were P546,750. Purchases of raw materials were
P200,000 and freight on purchases, P30,000. Direct labor during the period was
P160,000. It was agreed with insurance adjusters than an average gross profit rate of
35% based on cost be used and that direct labor cost was 160% of factory overhead.
REQUIRED:
Based on the above and the result of your audit, you are to determine:
1. Raw materials used
a. P290,000 b. P140,000 c. P260,000 d. P170,000
2. The total value of goods put in process
a. P786,000 b. P600,000 c. P630,000 d. P430,000
3. The value of goods manufactured and completed as of June 1, 2003
a. P365,000 b. P315,388 c. P445,000 d. P420,000
4. The work in process inventory destroyed as computed by the adjuster
a. P314,612 b. P185,000 c. P366,000 d. P265,000

PROBLEM NO. 9
Malabon Sales Company uses the first-in, first-out method in calculating cost of goods
sold for the three products that the company handles. Inventories and purchase
information concerning the three products are given for the month of October.
Product C Product P Product A
Oct. 1 Inventory 50,000 units 30,000 units 65,000 units
at P6.00 at P10.00 at P0.90
Oct. 1-15 Purchases 70,000 units 45,000 units 30,000 units
at P6.50 at P10.50 at P1.25
Oct. 16-31 Purchases 30,000 units
at P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most recent
purchase prices by the following percentages: product C, 20%; product P, 10%; product A,
8%. Accordingly, Malabon decided to reduce its sales prices on all items by 10%, effective
November 1. Malabon’s selling cost is 10% of sales price. Products C and P have a
normal profit (after selling costs) of 30% on sales prices, while the normal profit on product
A (after selling cost) is 15% of sales price.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total cost of Inventory at October 31 is
a. P565,000 b. P557,310 c. P655,500 d. P617,500

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2. The amount of Inventory to be reported on the company’s balance sheet at October

31 is
a. P569,850 b. P559,350 c. P543,810 d. P595,350
3. The Allowance for inventory write down at October 31 is
a. P5,650 b. P85,650 c. P13,500 d. P60,150
4. The cost of sales, before loss on inventory writedown, for the month of October is
a. P1,298,500 b. P1,022,260 c. P1,293,650 d. P1,208,000

PROBLEM NO. 10
Select the best answer for each of the following:
1. Which of the following audit procedures probably provides the most reliable evidence
concerning the entity’s assertion of rights and obligations related to inventories?
a. Trace 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 advices used before the physical count and determine
whether shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.

2. An auditor most likely to inspect loan agreements under which an entity’s inventories
are pledged to support management’s financial statement assertion of
a. Existence or occurrence. c. Presentation and disclosure.
b. Completeness. d. Valuation or allocation.

3. An auditor selected items for test counts while observing a client’s physical inventory.
The auditor then traced the test counts to the client’s inventory listing. This procedure
most likely obtained evidence concerning
a. Existence or occurrence. c. Rights and obligations.
b. Completeness. d. Valuation.

4. Periodic cycle counts of selected inventory items are made at various times during the
year rather than a single inventory count at year-end. Which of the following is
necessary if the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

5. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high an auditor will probably
a. Apply gross profit tests to ascertain the reasonableness of the physical counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of the year.
d. Insist that the client perform physical counts of inventory items several times during
the year.

6. After accounting for a sequential of inventory tags, an auditor traces a sample of tags to
the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.

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7. If the perpetual inventory records show lower quantities of inventory that the physical
count an explanation of the difference might be unrecorded
a. Sales. c. Purchases.
b. Purchase returns. d. Purchase discounts.

8. The physical count of inventory of a retailer was higher than shown by the perpetual
records. Which of the following could explain the difference?
a. Inventory item has been counted but the tags placed on the items had not been
taken off the items and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
d. An item purchased “FOB shipping point” had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.

9. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual inventory records.

10. Purchase cut-off procedures should be designed to test whether all inventory
a. Purchased and received before year-end was paid for.
b. Ordered before year-end was received.
c. Purchased and received before year-end was recorded.
d. Owned by the company is in the possession of the company at year-end.

11. The audit of year-end inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. This audit steps should be designed to
detect whether merchandise included in the physical count at year-end was not
recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period

12. An auditor’s observation of physical inventories at the main plant at year-end provides
direct evidence to support which of the following objectives?
a. Accuracy of the priced-out inventory.
b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance (reserve)
for obsolescence.
d. Determination of goods on consignment at another location.

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audit problems cash and cash equivalents

BS in Accountancy (Cor Jesu College)

StuDocu is not sponsored or endorsed by any college or university

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CEBU CPAR CEtfTER, www.Cebu-CPAR.com

AUDIT OF CASH AND CASH EQUIVALENTS
PROBLEM NO. 1
In connection with your audit of Caloocan Corporation for the year ended December 31, 2006, you
gathered the following:
1. Current account at Metrobank P2,000,000
2. Current account at BPI (100,000)
3. Payroll account 500,000
4. Foreign bank account – restricted (in equivalent pesos) 1,000,000
5. Postage stamps 1,000
6. Employee’s post dated check 4,000
7. IOU from controller’s sister 10,000
8. Credit memo from a vendor for a purchase return 20,000
9. Traveler’s check 50,000
10. Not-sufficient-funds check 15,000
11. Money order 30,000
12. Petty cash fund (P4,000 in currency and expense
receipts for P6,000) 10,000
13. Treasury bills, due 3/31/07 (purchased 12/31/06) 200,000
14. Treasury bills, due 1/31/07 (purchased 1/1/06) 300,000

Question:
Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported on the December 31, 2006 balance sheet.
a. P2,784,000 c. P2,790,000
b. P3,084,000 d. P2,704,000

Suggested Solution:

Current account at Metrobank P2,000,000

Payroll account 500,000
Traveler’s check 50,000
Money order 30,000
Petty cash fund (P4,000 in currency) 4,000
Treasury bills, due 3/31/07 (purchased 12/31/06) 200,000
Total P2,784,000

Answer: A

PROBLEM NO. 2
In the course of your audit of the Las Piñas Corporation, its controller is attempting to determine the
amount of cash to be reported on its December 31, 2006 balance sheet. The following information is
provided:

1. Commercial savings account of P1,200,000 and a commercial checking account balance of

P1,800,000 are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee
to reimburse through salary deduction).
3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term
debt.
4. Petty cash fund of P10,000.
5. An I.O.U. from a company officer in the amount of P40,000.
6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.
7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.
8. Las Piñas has received a check dated January 2, 2007 in the amount of P150,000.
9. Las Piñas has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure
future credit availability.
10. Currency and coin on hand amounted to P15,000.

Question:
Based on the above and the result of your audit, how much will be reported as cash and cash
equivalent at December 31, 2006?
a. P3,025,000 c. P2,575,000
b. P2,825,000 d. P5,025,000

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Suggested Solution:

Savings account at PS Bank P1,200,000

Checking account at PS Bank 1,800,000
Petty cash fund 10,000
Currency and coin 15,000
Total P3,025,000

Answer: A

PROBLEM NO. 3
The cash account of the Makati Corporation as of December 31, 2006 consists of the following:
On deposit in current account with Real Bank P 900,000
Cash collection not yet deposited to the bank 350,000
A customer’s check returned by the bank for insufficient 150,000
fund
A check drawn by the Vice-President of the Corporation
dated January 15, 2007 70,000
A check drawn by a supplier dated December 28, 2006 for
goods returned by the Corporation 60,000
A check dated May 31,2006 drawn by the Corporation
against the Piggy Bank in payment of customs duties.
Since the importation did not materialize, the check was
returned by the customs broker. This check was an
outstanding check in the reconciliation of the Piggy
Bank account 410,000
Petty Cash fund of which P5,000 is in currency; P3,600 in
form of employees’ I.O.U. s; and P1,400 is supported by
approved petty cash vouchers for expenses all dated
prior to closing of the books on December 31, 2006 10,000
Total 1,950,000
Less: Overdraft with Piggy Bank secured by a Chattel
mortgage on the inventories 300,000
Balance per ledger P1,650,000

Question:
At what amount will the account “Cash” appear on the December 31, 2006 balance sheet?
a. P1,315,000 c. P1,495,000
b. P1,425,000 d. P1,725,000

Suggested Solution:
Current account with Real Bank P 900,000
Undeposited collection 350,000
Supplier's check for goods returned by the Corporation 60,000
Unexpended petty cash 5,000
Current account with Piggy Bank (P410,000 - P300,000) 110,000
Total P1,425,000

Answer: B

PROBLEM NO. 4
You noted the following composition of Malabon Company’s “cash account” as of December 31, 2006
in connection with your audit:
Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2007) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2007 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000

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Additional information follows:

a) Check of P200,000 in payment of accounts payable was recorded on December 31, 2006 but
mailed to suppliers on January 5, 2007.
b) Check of P100,000 dated January 15, 2007 in payment of accounts payable was recorded and
mailed on December 31, 2006.
c) The company uses the calendar year. The cash receipts journal was held open until January
15, 2007, during which time P400,000 was collected and recorded on December 31, 2006.

Question:
The cash and cash equivalents to be shown on the December 31, 2006 balance sheet is a.
P3,310,000 c. P2,910,000
b. P1,910,000 d. P4,410,000

Suggested Solution:

Demand deposit account as adjusted:

Demand deposit account per books P2,000,000
Undelivered check 200,000
Postdated check issued 100,000
Window dressing of collection (400,000) P1,900,000
Time deposit - 30 days 1,000,000
Petty cash fund 10,000
Cash and cash equivalents P2,910,000

Answer: C

PROBLEM NO. 5
You were able to gather the following from the December 31, 2006 trial balance of Mandaluyong
Corporation in connection with your audit of the company:
Cash on hand P 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P40,000 returned by bank on December 26, 2006 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2007.
b. Customer’s check for P20,000 dated January 2, 2007, received on December 29, 2006.
c. Postal money orders received from customers, P30,000.

The petty cash fund consisted of the following items as of December 31, 2006.
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with
names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Mandaluyong Corporation, payable to the
petty cashier 4,000
P10,100

Included among the checks drawn by Mandaluyong Corporation against the BPI current account
and recorded in December 2006 are the following:
a. Check written and dated December 29, 2006 and delivered to payee on January 2, 2007,
P80,000.
b. Check written on December 27, 2006, dated January 2, 2007, delivered to payee on
December 29, 2006, P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2006.

The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance
sheet date.

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Questions:
Based on the above and the result of your audit, determine the adjusted balances of following:
1. Cash on hand
a. P410,000 c. P470,000
b. P530,000 d. P440,000
2. Petty cash fund
a. P6,000 c. P2,000
b. P7,200 d. P4,900
3. BPI current account
a. P1,000,000 c. P1,080,000
b. P1,120,000 d. P1,040,000
4. Cash and cash equivalents
a. P2,917,200 c. P3,052,000
b. P3,074,900 d. P3,066,000

Suggested
Solution:

Question No. 1

Unadjusted cash on hand P500,000

NSF check (40,000)
Post dated check received (20,000)
Adjusted cash on hand P440,000

Question No. 2

Petty cash fund per total P10,100

Employees' vales (IOU) (1,600)
Currency in envelope marked "collections for charity" (1,200)
Unreplenished petty cash vouchers (1,300)
Petty cash fund, as adjusted P 6,000

Alternative computation:

Currency and coins P 2,000

Replenishment check 4,000
Petty cash fund, as adjusted P 6,000

Question No. 3

Unadjusted BPI current account P1,000,000

Unreleased check 80,000
Post dated check delivered 40,000
Adjusted BPI current account P1,120,000

Question No. 4

Cash on hand (see no. 1) P 440,000

Petty cash fund (see no. 2) 6,000
BPI current account (see no. 3) 1,120,000
Security Bank current account (net of
overdraft of P80,000) 1,000,000
PNB time deposit 500,000
Cash and cash equivalents, as adjusted P3,066,000

Answers: 1) D; 2) A; 3) B; 4) D

PROBLEM NO. 6
The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2006.
The bank statement as of December 31 showed a balance of P547,800. Additional information that
might be useful in reconciling the two balances follows:

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(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored
on December 29 (maturity date). The bank charged Manila's account for P142,650, including a
protest fee of P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit
of P27,000.
(d) Outstanding checks totaled P98,850 as of December 31.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee.
Questions:
Based on the above and the result of your audit, determine the following:
1. Adjusted cash in bank balance
a. P583,200 c. P589,200
b. P577,200 d. P512,400
2. Net adjustment to cash as of December 31, 2006
a. P104,370 c. P 98,370
b. P110,370 d. P175,170

Suggested Solution:

Question No. 1

Balance per bank statement, 12/31/06 P547,800

Add: Deposits in transit P134,250
Bank error-deposit not recorded 6,000 140,250
Total 688,050
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/06 P589,200

Balance per books, 12/31/06 P687,570

Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 748,860
Less: Dishonored note 142,650
Book error-improperly recorded 1,950
deposit
NSF check 12,960
Bank service charges 2,100 159,660
Adjusted book balance, 12/31/06 P589,200

Question No. 2

Unadjusted balance per books, 12/31/06 P687,570

Adjusted book balance, 12/31/06 589,200
Net adjustment to cash – credit P 98,370

Answers: 1) C; 2) C

PROBLEM NO. 7
Shown below is the bank reconciliation for Marikina Company for November 2006:
Balance per bank, Nov. 30, 2006 P150,000
Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks P28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2006 P136,000

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The bank statement for December 2006 contains the following data:
Total deposits P110,000
Total charges, including an NSF check of P8,000 and a
service charge of P400 96,000

All outstanding checks on November 30, 2006, including the bank credit, were cleared in the bank
1n December 2006.

There were outstanding checks of P30,000 and deposits in transit of P38,000 on December 31,
2006.

Questions:
Based on the above and the result of your audit, answer the following:
1. How much is the cash balance per bank on December 31, 2006?
a. P154,000 c. P164,000
b. P150,000 d. P172,400
2. How much is the December receipts per books?
a. P124,000 c. P110,000
b. P 96,000 d. P148,000

3. How much is the December disbursements per books?

a. P96,000 c. P89,600
b. P79,600 d. P98,000
4. How much is the cash balance per books on December 31, 2006?
a. P150,000 c. P180,400
b. P170,400 d. P162,000
5. The adjusted cash in bank balance as of December 31, 2006 is
a. P141,600 c. P172,000
b. P162,000 d. P196,000

Suggested
Solution:
Question No. 1
Balance per bank, Nov. 30, 2006 P150,000
Add: Total deposits per bank statement 110,000
Total 260,000
Less: Total charges per bank statement 96,000
Balance per bank, Dec. 31, 2006 P164,000

Question No. 2
Total deposits per bank statement P110,000
Less deposits in transit, Nov. 30 24,000
Dec. receipts cleared through the bank 86,000
Add deposits in transit, Dec. 31 38,000
December receipts per books P124,000

Question No. 3
Total charges per bank statement P96,000
Less: Outstanding checks, Nov. 30 P28,000
Correction of erroneous bank credit 10,000
December NSF check 8,000
December bank service charge 400 46,400
Dec. disb. cleared through the bank 49,600
Add outstanding checks, Dec. 31 30,000
December disbursements per books P79,600

Question No. 4
Balance per books, Nov. 30, 2006 P136,000
Add December receipts per books 124,000
Total 260,000
Less December disbursements per books 79,600
Balance per books, Dec. 31, 2006 P180,400

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Question No. 5
Balance per bank statement, 12/31/06 P164,000
Deposits in transit 38,000
Outstanding checks ( 30,000)
Adjusted bank balance, 12/31/06 P172,000

Balance per books, 12/31/06 P180,400

NSF check ( 8,000)
Bank service charges ( 400)
Adjusted book balance, 12/31/06 P172,000

Answers: 1) C; 2) A; 3) B; 4) C; 5) C

PROBLEM NO. 8
The accountant for the Muntinlupa Company assembled the following data:
June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10, returned by 8,250
bank on July 16 marked NSF, and redeposited
immediately; no entry made on books for
return or redeposit
Collection by bank of company's notes receivable 71,815 80,900

The bank statements and the company's cash records show these totals:

Disbursements in July per bank statement P218,373

Cash receipts in July per Muntinlupa's books 236,452

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:
1. How much is the adjusted cash balance as of June 30?
a. P87,565 c. P107,082
b. (P3,695) d. P15,822
2. How much is the adjusted bank receipts for July?
a. P253,787 c. P245,537
b. P214,802 d. P232,881
3. How much is the adjusted book disbursements for July?
a. P220,767 c. P181,782
b. P212,517 d. P206,673
4. How much is the adjusted cash balance as of July 31?
a. P137,817 c. P22,513
b. P112,335 d. P120,585
5. How much is the cash shortage as of July 31?
a. P8,250 c. P196,144
b. P71,815 d. P0

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Suggested Muntinlupa Company
Solution: Reconciliation of Receipts, Disbursements, and Bank Balance
For the month ended July 31
Beginning Ending
June 30 Receipts Disb. July 31
statement P107,082 P249,108a P218,373 P137,817
Deposits in transit:
June 30 8,201 (8,201)
Balance per bank July 31 12,880 12,880
Outstanding checks:
June 30 (27,718) (27,718)
July 31 30,112 (30,112)
NSF check
redeposited (8,250)
(8,250) Adjusted
bank
balance P 87,565 P245,537 P212,517 P120,585

Balance per books P 15,822 P236,452

P212,529b P 39,745
Bank service charge:
June (72) (72)
July 60 (60)
C
o
l
l
e
c
t
i
o
n

o
f

n
o
t
e
s

r
e
c
e
i
v
a
b
l
e
:
June 71,815 (71,815)
July 80,900
80,900
Adjusted book
balance P 87,565 P245,537 P212,517 P120,585
a (P137,817 + P218,373 – P107,082)
b (P15,822 + 236,452 – P39,745)
Answers: 1) A; 2) C; 3) B; 4) D; 5) D
PROBLEM NO. 9
In the audit of Pasig Company’s cash account, you obtained the following
information:
The company’s bookkeeper prepared the following bank reconciliation as of
November 30, 2006:
Bank balance – November 30, 2006 P90,800
Undeposited collections 5,000
Bank service charges 100

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Bank collection of customer’s note
f. Undeposited collections on December 31, 2006 - P8,000.
Outstanding checks:
g. The service charge for December was P150 which was charged by the bank
to another client.
h.The bank collected a note receivable of P7,000 on December 28, 2006, but
the collection was not received on time to be recorded by Pasig.
Book balance – November 30, 2006
Additional data are
given as follows:
a. Company
recordings for
December:
Total collections from customers
Total checks drawn
b. Bank
statement
totals for
December :
Charges
Credits
c. Check no.
7159 dated
November
25, 2006, was
entered as
P3,000 in
payment of a
voucher for
P30,000.
Upon
examination
of the checks
returned by
the bank, the
actual
amount of
the check was
P30,000.
d. Check no.
8113 dated
December
20, 2006 was
issued to
replace a
mutilated
check
(no.7767),
which was
returned by
the payee.
Both checks
were
recorded in
the amount
drawn,
P5,000, but
no entry was
made to
cancel check
no. 7767.
e. The December
bank
statement
included a
check drawn
by Sipag
Company for
P1,500.

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i. The outstanding checks on December 31, 2006, were:

Check No. Amount Check No. Amount
7767 P5,000 8910 P2,300
8856 1,300 8925 4,100
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Unadjusted cash balance per books as of December 31, 2006
a. P152,800 c. P144,900
b. P152,750 d. P165,700
2. Adjusted cash balance as of November 30, 2006
a. P85,800 c. P63,800
b. P58,800 d. P90,800
3. Adjusted book receipts for December 2006
a. P170,500 c. P172,000
b. P182,000 d. P173,000
4. Adjusted bank disbursement for December 2006
a. P120,150 c. P125,150
b. P 76,150 d. P 98,150
5. Adjusted cash balance as of December 31, 2006
a. P132,650 c. P137,800
b. P137,650 d. P134,650

Suggested
Solution:
Question No. 1
Unadjusted book balance, 11/30/06 P77,900
Add unadjusted book receipts:
Collection from customers P165,000
Note collected by bank in Nov.
presumed recorded in Dec. 8,000 173,000
Total 250,900
Less unadjusted book disbursements:
Checks drawn 98,000
BSC for Nov. presumed recorded in Dec. 100 98,100
Unadjusted book balance, 12/31/06 P152,800

Question Nos. 2 to
5 Pasig Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P90,800 P169,000 P123,800 P136,000a
Deposits in transit:
November 30 5,000 (5,000)
December 31 8,000 8,000
Outstanding checks:
November 30 (32,000) (32,000)
December 31 7,700 (7,700)
Bank errors – Dec.
Check of Sipag Co. (1,500) 1,500
BSC charged to
another client 150 (150)
Adjusted bank
balance P63,800 P172,000 P 98,150 P137,650

Balance per books P77,900 P173,000 P98,100 P152,800

Customer's note
collected by bank:
November 8,000 (8,000)
December 7,000 7,000

Bank service charge:

November (100) (100)
December 150 (150)

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Beginning Ending
Nov. 30 Receipts Disb. Dec. 31

Book errors:
Check no. 7159
(P30,000-P3,000) (27,000) (27,000)
Check no. 7767
(mutilated check) 5,000 5,000
Adjusted book
balance P63,800 P172,000 P 98,150 P137,650
a (P90,800 + P169,000 – P123,800)

Answers: 1) A; 2) C; 3) C; 4) D; 5) B

PROBLEM NO. 10
You obtained the following information on the current account of Parañaque Company during your
examination of its financial statements for the year ended December 31, 2006.

The bank statement on November 30, 2006 showed a balance of P306,000. Among the bank credits
in November was customer’s note for P100,000 collected for the account of the company which the
company recognized in December among its receipts. Included in the bank debits were cost of
checkbooks amounting to P1,200 and a P40,000 check which was charged by the bank in error
against Parañaque Co. account. Also in November you ascertained that there were deposits in
transit amounting to P80,000 and outstanding checks totaling P170,000.

The bank statement for the month of December showed total credits of P416,000 and total charges
of P204,000. The company’s books for December showed total debits of P735,600, total credits of
P407,200 and a balance of P485,600. Bank debit memos for December were: No. 121 for service
charges, P1,600 and No. 122 on a customer’s returned check marked “Refer to Drawer” for P24,000.

On December 31, 2006 the company placed with the bank a customer’s promissory note with a face
value of P120,000 for collection. The company treated this note as part of its receipts although the
bank was able to collect on the note only in January, 2007.

A check for P3,960 was recorded in the company cash payments books in December as P39,600.

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:
1. How much is the undeposited collections as of December 31, 2006?
a. P339,600 c. P219,600
b. P179,600 d. P139,600
2. How much is the outstanding checks as of December 31, 2006?
a. P191,960 c. P361,960
b. P397,600 d. P363,160
3. How much is the adjusted cash balance as of November 30, 2006?
a. P216,000 c. P176,000
b. P256,000 d. P157,200
4. How much is the adjusted bank receipts for December?
a. P635,600 c. P475,600
b. P515,600 d. P435,600
5. How much is the adjusted book disbursements for December?
a. P395,960 c. P225,960
b. P431,600 d. P397,160
6. How much is the adjusted cash balance as of December 31, 2006?
a. P625,640 c. P220,000
b. P195,640 d. P375,640

10

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Suggested
Solution:

Question No. 1

Deposits in transit, 11/30/06 P80,000

Add collections in December:
December book receipts P735,600
Less receipts not representing
collections in December:
Customer’s note collected by
bank in Nov. recorded in Dec. P100,000
Uncollected customer's note
treated as receipts 120,000 220,000 515,600
Total 595,600

Less deposits credited by the bank in

December:
December bank receipts P416,000
Less receipts not representing
deposits:
Erroneous bank debit, Nov.;
corrected Dec. 40,000 376,000
Deposits in transit, 12/31/06 P219,600

Question No. 2

Outstanding checks, 11/30/06 P170,000

Add checks issued in December:
December book disbursements P407,200
Less disbursements not
representing checks issued in
December:
Bank service charge, Nov.;
recorded Dec. P1,200
Error in recording a check
(should be P3,960, recorded
as P39,600) 35,640 36,840 370,360
Total 540,360
Less checks paid by the bank in
December:
December bank disbursements P204,000
Less disbursements not
representing checks:
Bank service charge, Dec. P1,600
NSF check, Dec. 24,000 25,600 178,400
Outstanding checks, 12/31/06 P361,960

Question Nos. 3 to 6
Parañaque Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P306,000 P416,000 P204,000 P518,000a
Deposits in transit:
November 30 80,000 (80,000)
December 31 219,600 219,600
Outstanding checks:
November 30 (170,000) (170,000)
December 31 361,960 (361,960)
Erroneous bank
debit-November 40,000 (40,000)
Adjusted bank
balance P256,000 P515,600 P395,960 P375,640

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Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per books P157,200b P735,600 P407,200 P485,600
Customer's note
collected by bank -
November 100,000 (100,000)
Bank service charge:
November (1,200) (1,200)
December 1,600 (1,600)
NSF check -
December 24,000 (24,000)
Book errors -
December
Uncollected
customer's note
treated as
receipts (120,000) (120,000)
Error in
recording a
check (should
be P3,960,
recorded as (35,640) 35,640
P39,600)
Adjusted book
balance P256,000 P515,600 P395,960 P375,640
a (P306,000 + P416,000 – P204,000)
b (P485,600 + 407,200 – P735,600)

Answers: 1) C; 2) C; 3) B; 4) B; 5) A; 6) D

PROBLEM NO. 11
You were able to obtain the following information in connection with your audit of the Cash account
of the Pasay Company as of December 31, 2006:
November 30 December 31
a. Balances per bank P480,000 P420,000
b. Balances per books 504,000 539,000
c. Undeposited collections 244,000 300,000
d. Outstanding checks 150,000 120,000

e. The bank statement for the month of December showed total credits of P240,000 while the
debits per books totaled P735,000.

f. NSF checks are recorded as a reduction of cash receipts. NSF checks which are later
redeposited are then recorded as regular receipts. Data regarding NSF checks are as follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.

g. Check of Pasaway Company amounting to P90,000 was charged to the company’s account by
the bank in error on December 31.

h. A bank memo stated that the company’s account was credited for the net proceeds of Anito’s
note for P106,000.

i. The company has hypothecated its accounts receivable with the bank under an agreement
whereby the bank lends the company 80% of the hypothecated accounts receivable. The
company performs accounting and collection of the accounts. Adjustments of the loan are made
from daily sales reports and deposits.

j. The bank credits the company account and increases the amount of the loan for 80% of the
reported sales. The loan agreement states specifically that the sales report must be accepted by
the bank before the company is credited. Sales reports are forwarded by the company to the
bank on the first day following the date of sale. The bank allocates each deposit 80% to the
payment of the loan, and 20% to the company account. Thus, only 80% of each day’s sales and
20% of each collection deposits are entered on the bank statement. The company accountant
records the hypothecation of new accounts receivable (80% of sales) as a debit to Cash and a
credit to the bank loan as of the date of sales. One hundred percent of the collection on
accounts receivable is recorded as a cash receipt; 80% of the collection is recorded in the cash
disbursements books as a payment on the loan. In connection with the hypothecation, the
following facts were determined:

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 Included in the undeposited collections is cash from the hypothecation of accounts

receivable. Sales were P180,000 on November 30, and P200,000 at December 31. The
balance was made up from collections which were entered on the books in the manner
indicated above.
 Collections on accounts receivable deposited in December, other than deposits in transit,
totaled P725,000.
k. Interest on the bank loan for the month of December charged by the bank but not recorded in
the books, amounted to P38,000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of November 30, 2006?
a. P574,000 c. P430,000
b. P394,000 d. P350,000
2. How much is the adjusted book receipts for December, 2006?
a. P860,000 c. P876,000
b. P280,000 d. P296,000
3. How much is the adjusted book disbursements for December, 2006?
a. P180,000 c. P180,000
b. P905,000 d. P760,000
4. How much is the adjusted cash balance as of December 31, 2006?
a. P690,000 c. P440,000
b. P530,000 d. P490,000
5. How much is the cash shortage as of December 31, 2006?
a. P32,000 c. P8,000
b. P90,000 d. P0
Suggested Solution:
Pasay Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P480,000 P240,000 P300,000a P420,000
Deposits in transit:
November 30 100,000c (100,000)
December 31 140,000d 140,000
Outstanding checks:
November 30 (150,000) (150,000)
December 31 120,000 (120,000)
Erroneous bank
debit-December (90,000) 90,000
Deposits with loan
payment
(P725,000 x 80%) 580,000 580,000
Adjusted bank
balance P430,000 P860,000 P760,000 P530,000

Balance per books P504,000 P735,000 P700,000b P539,000

NSF checks:
Returned in Nov.,
recorded in Dec. (10,000) 10,000
Returned and
recorded in Dec. 25,000 25,000
Returned in Dec.,
recorded in Jan. 29,000 (29,000)
Customer's note
collected by bank -
December 106,000 106,000
Anticipated loan
proceeds from AR
hypothecation:
Nov. 30 sales
(P180,000 x 80%) (144,000) 144,000
Dec. 31 sales (160,000)
(P200,000 x 80%)
(160,000)

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Beginning Ending
Nov. 30 Receipts Disb. Dec. 31

Anticipated loan
payment from
undeposited
collections:
Nov. 30
(P100,000 x 80%) 80,000 80,000
Dec. 31
(P140,000 x 80%) (112,000) 112,000
Interest charge for
bank loan in Dec. 38,000 (38,000)
Adjusted book
balance P430,000 P860,000 P760,000 P530,000
a (P480,000 + P240,000 –
P420,000) b (P504,000 + 735,000
– P539,000) c [P244,000 –
(P180,000 x 80%)]
d [P300,000 – (P200,000 x 80%)]

Answers: 1) C; 2) A; 3) D; 4) B; 5) D

PROBLEM NO. 12
In connection with your audit, Quezon Metals Company presented to you the following information:
Quezon Metals Company
Comparative Balance Sheets
December 31, 2006 and 2005
2006 2005
Assets
Current Assets:
Cash P 476,000 P 392,000
Available for sale securities 236,000 -
Accounts Receivable 1,248,000 1,016,000
Inventory 1,112,000 956,000
Prepaid expenses 140,000 84,000
Total Current Assets 3,212,000 2,448,000
Property, plant, and equipment 2,144,000 1,636,000
Accumulated depreciation (304,000) (212,000)
1,840,000 1,424,000
Total Assets P5,052,000 P3,872,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable P 848,000 P 792,000
Accrued expenses 392,000 304,000
Dividends Payable 160,000 -
Total Current Liabilities 1,400,000 1,096,000
Notes Payable - due 2008 500,000 -
Total Liabilities 1,900,000 1,096,000
Stockholders' Equity:
Common Stock 2,400,000 2,200,000
Retained earnings 752,000 576,000
Total Stockholders' Equity 3,152,000 2,776,000
Total Liabilities and Stockholders' Equity P5,052,000 P3,872,000

Quezon Metals Company

Condensed Comparative Income Statements
For the Years Ended December 31, 2006 and 2005
2006 2005
Net sales P14,244,000 P13,016,000
Cost of Goods Sold 11,156,000 10,272,000
Gross Profit 3,088,000 2,744,000
Expenses 2,084,000 1,944,000
Net Income P 1,004,000 P 800,000

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Additional information for Quezon:

(a) All accounts receivable and accounts payable relate to trade merchandise.
(b) The proceeds from the notes payable were used to finance plant expansion.
(c) Capital stock was sold to provide additional working capital.

QUESTIONS:
Based on the above and the result of your audit, compute the following for 2006:
1. Cash collected from accounts receivable, assuming all sales are on account.
a. P14,012,000 c. P14,476,000
b. P 796,000 d. P16,508,000
2. Cash payments made on accounts payable to suppliers, assuming that all purchases of
inventory are on account.
a. P11,368,000 c. P10,944,000
b. P11,212,000 d. P11,256,000
3. Cash payments for dividends.
a. P 828,000 c. P 668,000
b. P1,020,000 d. P1,180,000
4. Cash receipts that were not provided by operations.
a. P192,000 c. P700,000
b. P500,000 d. P 0
5. Cash payments for assets that were not reflected in operations.
a. P1,412,000 c. P 508,000
b. P 744,000 d. P1,176,000
Suggested Solution:
Question No. 1
Accounts receivable, 1/1/06 P 1,016,000
Add sales for 2006 14,244,000
Total collectible accounts 15,260,000
Less accounts receivable, 12/31/06 1,248,000
Cash collected from accounts receivable P14,012,000

Question No. 2
Accounts payable, 1/1/06 P 792,000
Add purchases for 2006:
Cost of goods sold for 2006 P11,156,000
Add Inventory, 12/31/06 1,112,000
Total goods available for sale 12,268,000
Less Inventory, 1/1/06 956,000 11,312,000
Total accounts to be paid 12,104,000
Less accounts payable, 12/31/06 848,000
Cash payments made on AP P11,256,000
Question No. 3
Retained earnings, 1/1/06 P 576,000
Add net income for 2006 1,004,000
Total 1,580,000
Less retained earnings, 12/31/06 752,000
Total dividends declared 828,000
Less increase in dividends payable 160,000
Cash payments for dividends P 668,000
Question No. 4
Proceeds from notes payable P500,000
Proceeds from issuance of common stock
(P2,400,000 - P2,200,000) 200,000
Cash receipts not provided by operations
(cash provided from financing) P700,000
Question No. 5
Purchase of available for sale securities P236,000
Purchase of PPE (P2,144,000 - P1,636,000) 508,000
Cash payments for assets that were not reflected
in operations P744,000

Answers: 1) A; 2) D; 3) C; 4) C; 5) B
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PROBLEM NO. 13
The Valenzuela Corporation was organized on January 15, 2006 and started operation soon
thereafter. The Company cashier who acted also as the bookkeeper had kept the accounting
records very haphazardly. The manager suspects him of defalcation and engaged you to audit his
account to find out the extent of the fraud, if there is any.
On November 15, when you started the examination of the accounts, you find the cash on hand to
be P25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s bank
deposit in current account on the same date was P131,640. Verification revealed that the check
issued for P9,260 is not yet paid by the bank. The corporation sells at 40% above cost.
Your examination of the available records disclosed the following information:
Capital stock issued at par for cash P1,600,000
Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which there
is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780
QUESTIONS:
Based on the above and the result of your audit, compute for the following as of November 15, 2006:
1. Collections from sales
a. P1,188,140 c. P1,615,040
b. P1,153,600 d. P2,041,940
2. Payments for purchases
a. P1,854,620 c. P1,207,204
b. P1,391,780 d. P 922,180
3. Total cash disbursements
a. P2,340,960 c. P2,810,560
b. P3,273,400 d. P2,625,984
4. Unadjusted cash balance
a. P 74,740 c. P1,007,180
b. P722,156 d. P 537,580
5. Cash shortage
a. P574,076 c. P859,100
b. P389,500 d. P 0
Suggested
Solution:
Question No. 1
Sales P1,615,040
Less accounts receivable, 11/15 426,900
Collections from sales P1,188,140
Question No. 2
Cost of sales (P1,615,040/1.4) P1,153,600
Add Merchandise inventory, 11/15 469,600
Purchases 1,623,200
Less Accounts payable, 11/15 231,420
Payments for purchases P1,391,780
Question No. 3
Purchase of real estate P1,000,000
Payment for furniture and fixtures
(P145,000 - P30,000) 115,000
Expenses paid 303,780
Payments for purchases (see no. 2) 1,391,780
Total cash disbursements P2,810,560
Question No. 4
Proceeds from issuance of common stock P1,600,000
Proceeds from mortgage note payable 400,000

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Proceeds from notes payable - bank 160,000

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Collections from sales (see no. 1) 1,188,140
Total cash receipts 3,348,140
Less cash disbursements (see no. 3) 2,810,560
Unadjusted cash balance P 537,580
Question No. 5
Cash accountability P537,580
Less cash accounted (Adjusted cash
balance):
Unadjusted bank balance P131,640
Deposit in transit 25,700
Outstanding checks (9,260) 148,080
Cash shortage P389,500

Answers: 1) A; 2) B; 3) C; 4) D; 5) B

PROBLEM NO. 14
You were engaged to audit the accounts of Taguig Corporation for the year ended December 31,
2006. In your examination, you determined that the Cash account represents both cash on hand
and cash in bank. You further noted that the company’s internal control over cash is very poor.
You started the audit on January 15, 2007. Based on your cash count on this date, cash on hand
amounted to P19,200. Examination of the cash book and other evidence of transactions disclosed
the following:
a. January collections per duplicate receipts, P75,200.
b. Total duplicate deposit slips, all dated January, P44,000. This amount includes a deposit
representing collections on December 31.
c. Cash book balance at December 31, 2006 amounted to P186,000, representing both cash on
hand and cash in bank.
d. Bank statement for December showed a balance of P170,400.
e. Outstanding checks at December 31:
November checks December checks
No. 280 P1,800 No. 331 P2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000
f. Undeposited collections at December 31, 2006 amounted to P20,000.
g. An amount of P4,400 representing proceeds of a clean draft on a customer was credited by
bank, but is not yet taken up in the company’s books.
h. Bank service charges for December, P400.
The company cashier presented to you the following reconciliation statement for December, 2006,
which he has prepared:
Balance per books, December 31, 2006 P180,600
Add outstanding checks:
No. 331 P2,400
339 1,600
345 2,000
353 3,600
364 1,000 10,600
Total 191,200
Bank service charge (400)
Undeposited collections (20,400)
Balance per bank, December 31, 2006 P170,400
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of December 31, 2006?
a. P152,800 c. P180,200
b. P144,400 d. P 0
2. How much is the cash shortage as of December 31, 2006?
a. P45,600 c. P37,200
b. P 4,400 d. P41,200

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3. How much is the cash shortage for the period January 1 to 15,
2007? a. P30,800 c. P31,200
b. P32,400 d. P32,000
4. Which of the following is not a method used by the cashier to cover-up the shortage as of
December 31, 2006?
a. Understating outstanding checks by P27,000.
b. Not recording the bank collection of P4,400.
c. Understating the book balance by P5,400.
d. Overstatement of undeposited collections by P400.
Suggested Solution:
Questions No. 1 and 2
Bank Books
Unadjusted balances P170,400 P186,000
Add (deduct) adjustments:
Outstanding checks: (46,000)
Undeposited collections 20,000
Unrecorded bank collection 4,400
Bank service charge (400)
Balances 144,400 190,000
Shortage (45,600)
Adjusted balances P144,400 P144,400

Question No. 3
Collections per records P75,200
Add undeposited collections, Dec. 31 20,000
Total cash that should be deposited in January 95,200
Less January deposits 44,000
Undeposited collections, Jan. 15 51,200
Less undeposited collections per cash count 19,200
Shortage, Jan. 1 to 15, 2007 P32,000

Question No. 4
Cover-up for the December 31, 2006 shortage:
Non-recording of bank collection P 4,400
Understatement of book balance
(P186,000 - P180,600) 5,400
Understatement of outstanding checks
(P46,000 - P10,600) 35,400
Overstatement of undeposited collections
(P20,400 - P20,000) 400
Total shortage, December 31, 2006 P45,600

Answers: 1) B; 2) A; 3) D; 4) A

PROBLEM NO. 15
Select the best answer for each of the following:
1. An auditor would consider a cashier’s job description to contain compatible duties if the cashier
receives remittance from the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.
b. Prelist of individual checks. d. Monthly bank reconciliation.
2. Which of the following internal control procedures will most likely prevent the concealment of a
cash shortage resulting from improper write-off of a trade account receivable?
a. Write-offs must be supported by an aging schedule showing that only receivables overdue
for several months have been written off.
b. Write-offs must be approved by the cashier who is in a position to know if the receivables
have, in fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
d. Write-offs must be authorized by company field sales employees who are in a position to
determine the financial standing of the customers.
3. An entity’s internal control structure requires every check request that there be an approved
voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To
determine whether checks are being issued for unauthorized expenditures, an auditor most
likely would select items for testing from the population of all
a. Cancelled checks. c. Purchase orders.
b. Approved vouchers. d. Receiving reports.

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4. Which of the following auditing procedures would the auditor not apply to a cutoff bank
statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash disbursements
record.
d. Determine that the year end deposit in transit was credited by the bank on the first working
day of the following accounting period.

5. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft of
P100,000. The other account, Bank B, has a positive balance of P50,000. To conceal the
overdraft from the auditor, the client may decide to
a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but
not the disbursement and list the receipt as a deposit in transit. Record the disbursement
at the beginning of the following year.
b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the receipt but
not the disbursement and list the receipt as a deposit in transit. Record the disbursement
at the beginning of the following year.
c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the disbursement but
not the receipt. List the disbursement as an outstanding check, but do not list the receipt
as a deposit in transit. Record the receipt at the beginning of the following period.
d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
disbursement but not the receipt and list the disbursement as an outstanding check.
Record the receipt at the beginning of the following year.

6. While performing an audit of cash, an auditor begins to suspect check kiting. Which of the
following is the best evidence that the auditor could obtain concerning whether kiting is taking
place?
a. Documentary evidence obtained by vouching credits on the latest bank statement to
supporting documents.
b. Documentary evidence obtained by vouching entries in the cash account to supporting
documents.
c. Oral evidence obtained by discussion with controller personnel.
d. Evidence obtained by preparing a schedule of interbank transfers.

7. Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term
bank loan by a debit to cash and a credit to sales. Which of the following is the most effective
procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

8. Postdated checks received by mail in settlement of customer’s accounts should be

a. Returned to customer.
b. Stamped with restrictive endorsement.
c. Deposited immediately by the cashier.
d. Deposited the day after together with cash receipts.

9. The cashier of Milady Jewelries covered a shortage in the cash working fund with cash obtained at
December 31 from a bank by cashing but not recording a check drawn on the company out of
town bank. How would you as an auditor discover the manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut-off statements of the succeeding month.
d. By preparing independent bank reconciliations as of December 31

10. An essential phase of the audit of the cash balance at the end of the year is the auditor's review of
cutoff bank statement. This specific procedure is not useful in determining if
a. Kiting has occurred.
b. Lapping has occurred.
c. The cash receipts journal was held open.
d. Disbursements per the bank statement can be reconciled with total checks written.

Answers: 1) A; 2) C; 3) A; 4) B, 5) B; 6) D; 7) A; 8) B; 9) C; 10) B

-end-

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Notes in Auditing Problems - Inventories and Cost of Sales

Theories
Auditing (Tomas del Rosario College )

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AUDITING PROBLEMS
LECTURE NOTES AND SUMMARY IN
Inventories and Cost of Sales Theories
SUMMARIZED BY: NRT | 2021
Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards

Audit of Inventories

Assertions 5. Accuracy

1. Occurrence 6. Cut-Off

2. Rights 7. Allocation

3. Obligation 8. Valuation

4. Completeness 9. Existence

*physical count, test count, test cut-off procedures, trace test counts, analytical procedures

Inventory Classifications:

1. Held for sale in the ordinary course of business; (Finished Goods Inventory)

2. In the process of production for such sale; (Work-in-Process (WIP) Inventory)

3. In the form of materials or supplies to be consumed in the production process or in the rendering
of services. (Raw Materials, Office Supplies, etc.)

Initial Valuation:

*at Cost

Subsequent Valuation:

*lower of Cost or Net Realizable Value

Net Realizable Value:

1. NRV of Finished Goods/Merchandise Inventory = Est. Selling Price less Est. Cost to Sell

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2. NRV of WIP Inventory = Est. Selling Price less Est. Cost to Complete less Est. Cost to Sell

3. NRV of Raw Materials and Supplies = Current Replacement Cost or Current Purchase Price

Freight Terms:

1. FOB destination: "Free on Board until destination"

goods in transit=seller is owner; freight=should be paid by seller

2. FOB shipping point: "Free on Board until shipping point ONLY"

goods in transit=buyer is owner; freight=should be paid by buyer

3. Freight collect: freight=was paid by buyer (not necessarily shouldered by the buyer)

4. Freight prepaid: freight=was paid by seller

5. FAS (free alongside): "Free Alongside to the dock ONLY"

freight up to the dock=seller; cost of loading and shipment=buyer

6. CIF (cost, insurance, freight): "Free until loading to the ship ONLY"

freight up to the dock and cost of loading=seller;

CIF and shipment=buyer

7. Ex-ship: "Free until the goods exited the ship"

freight until unloading=seller;

Inventory Systems:

1. Periodic: physical count at year end to determine COS and Inventory, End; inventory balance
updated at year-end

2. Perpetual: flow of goods is recorded every transaction; inventory balance always updated

List Price is not the intended selling price of the seller

(Trade discounts) are not recorded by the buyer or seller. Its deduction from the list price and
will reflect the intended selling price

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(Cash discounts) are recorded by the buyer or seller as sales/purchase discount.

Invoice Price is the net cost/sale price of the item.

Special Sale/Purchase Agreement

1. Goods on Consignment: inventory of consignor/seller

2. Sale on Approval: inventory of seller unless information identified that manifestation of

approval has been made

3. Inventory financing/Park sale/Product financing: inventory of seller

4. Sale with right of return: inventory of seller unless right of return is considered normal in the
industry (e.g., Retail) or time for right of return has already lapsed

5. Installment sales: inventory of buyer

6. Segregated goods: mere segregation of goods does not exclude the same from the seller's
inventory unless identified that sale is covered by a special sale agreement (BILL AND HOLD)
as in when goods were already billed and awaiting the pick-up of the customer

Inventory Valuation:

1. Specific Identification Method (SIM) - specific costs are attributed to identified items of
inventory.

2. First-in, first-out (FIFO) - assume that items purchased first are sold first, and consequently,
items at the end of the period are those most recently purchased or produced.

3. Weighted Average Cost - cost of each item is determined from the weighted average of the cost
of similar items at the beginning of a period and the cost of similar items purchased or produced
during the period

Other Notes:

1. Purchase or sale of goods with right of repossession are still the inventory of the one who
contains the right to repossess. Although there was a transfer of ownership, the goods can be
bought back without restriction even if the present owner does not want to part with the goods.

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2. The standard requires that all purchases must be recorded at net (Net Method, net of all
discounts). Discounts that were not taken are attributable to the management.

3. Abnormal amounts of wasted materials, labor and other production costs are excluded from the
cost of inventories and recorded as expense. Normal wastage are part of cost of sales.

4. Storage costs relating to finished goods are expensed, while those relating to WIP are
capitalized.

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Pdf auditing problems compilation of questions receivables 1

Basic Accounting (University of La Salette)

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CEDRICK P. DELA ROSA

Easy

1. Orr Company prepared an aging of accounts receivable on December 31, 2016 and
determined that net realizable value of the accounts receivable was P 2,500,000.

 Allowance for doubtful

doubtful accounts
accounts on Jan.1
Jan.1 280,000

 Accounts written
written off as
as uncollectible
uncollectible 230,000

 Accounts Receivable
Receivable on December
December 31 2,700,000

Uncollectible
Uncollectibl e accounts recovery 50,000

What amount should be recognized as doubtful accounts expense for the current year?

(Problem 19-1, Practical Accounting 1, Valix , 2016)

2. Seiko Company reported the following balances after adjustment at year-end:

2016 2015

 Accounts Receivable
Receivable 5,250,000
5,250,000 4,800,000
Net Realizable Value 5,100,000 4,725,000

During 2016, the entity wrote off accounts totalling P 160,000 and collected P 40,000 on
accounts written off in previous year.

What amount should be recognized as doubtful accounts expense for the year ended Dec.
31,2016?

(Problem 19-2, Practical Accounting 1, Valix, 2016)

3. Roanne Company used the allowance method of accounting for uncollectible accounts.
During the current year, the entity had charged P800,000 to bad debt expense, and
wrote off accounts receivable of P 900,000 as uncollectible.

What was the decrease in working capital?

(Problem 19-3, Practical Accounting 1, Valix, 2016)

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Moderate

1. Tara Company provided the following information pertaining to accounts receivable on

Dec.31,2016:

Days Outstanding Estimated Amount Estimated

uncollectible

0 – 60 1,200,000 1%

61 –
61 – 120 900,000 2%

Over 120 1,000,000 60,000

3,100,000

During the current year, the entity wrote off P70,000 in accounts receivable and recovered P
40,000 that had been written off in prior years.

On January 1,2016, the allowance for uncollectible accounts was P100,000.

Under the aging method, what amount of allowance for uncollectible accounts should be
reported on Dec. 31, 2016?

(Problem 19-6, Practical Accounting 1, Valix, 2016)

2. Delta Company sold goods to wholesaler on terms 2/15, net 30. The entity had no cash
sales but 50% of the customer took advantage of the discount.

The entity used the gross method of recording sales and accounts receivable.

 An analysis
analysis of the trade
trade accounts
accounts receivable
receivable at year-end
year-end revealed
revealed the following:

 Age Amount Collectible

0 -15 days 2,000,000 100%
16- 30 days 1,400,000 95%
31-60 days 400,000 90%
Over 60 days 200,000 50%

4,000,000

What amount should be reported as allowance for doubtful accounts at the year-end?

(Problem 19-8, Practical Accounting 1, Valix, 2016)

3. On January 1 ,2016, Jamin Company had a credit balance of P 260,000 in the allowance
for uncollectible accounts. Based on past experience, 2% of credit sales would be
uncollectible.

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During the current year, the entity wrote off P 325,000 of uncollectible accounts. Credit sales for
the year totaled P 9,000,000.

On December 31, 2016, what amount should be reported as allowance for uncollectible
accounts?

(Problem 19-10, Practical Accounting 1, Valix, 2016)

Difficult

1. Kalibo Bank loaned P 5,000,000 to Catician Company on January 1, 2014. The terms of
the loan require principal payments of P 1,000,000 each year for 5 years plus interest at
8%.

The first principal and interest payment is due on January 1, 2015. Caticlan Company
made the required payments during 2015 and 2016.

However, during 2016 Caticlan Company began to experience financial difficulties,

requiring Kalibo Bank to reassess the collectability of the loan.

On December 31, 2016, Kalibo Bank has determined that the remaining principal
payment will be collected buy the collection of interest is unlikely. Kalibo Bank did not
accrue the interest in December 31, 2016.

What is the loan impairment loss on December 31, 2016?

What is the interest income for 2017?

(Problem 25-2, Practical Accounting 1, Valix, 2016)

2. On December 31, 2016, Oregon Bank recorded an investment of P 5,000,000 in a loan

grated to a client. The loan has a 10% effective interest rate payable annually every Dec.
31. The principal is due in full at maturity on December 31, 2019.

Unfortunately, the borrower is experiencing significant financial difficulty and will have
difficult time in making full payment.

The bank projected the entire principal will be paid at maturity and 4% or P200,000 will
be paid annually on December 31 of the next three years. There is no accrued interest
on December 31, 2016.

What is the loan impairment loss for 2016?

(Problem 25-6, Practical Accounting 1, Valix, 2016)

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3. On December 31, 2016, London Bank granted a P 5,000,000 loan to a borrower with
10% state rate payable annually and maturing in 5 years. The loan was discounted at
the market interest rate of 12%. Unfortunately, the financial condition of the borrower
worsened because of lower revenue.

On December 31, 2018, the bank determined that the borrower would pay back only P
3,000,000 of the principal at maturity.

However, it was considered likely that the interest would continue to be paid on the P
5,000,000 loan.

What is the amount of cash paid to the borrower on December 31, 2016?
What is the carrying amount of the loan receivable on December 31, 2018?

(Problem 25-7, Practical Accounting 1, Valix, 2016)

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Chastyn V. Ramos

Easy:

1. Banaba Co. reported the following information at the end of its first year of
operation, December 31, 2016:

Bad debt expense for 2016 271,000

Uncollectible accounts written off during 2016 35,400

Net realizable value of accounts receivable 895,000

What is the accounts receivable balance in December 31, 2016?

Source: Auditing Problems (Gerardo S. Roque)

2. The following information pertains to ACACIA, INC. for the year ended December
31, 2016:
Credit sales during 2016 4,450,000
Collection of accounts written off in prior periods 170,000
Worthless accounts written off in 2016 191,000
 Allowance for doubtful accounts, Jan. 1, 2016 155,000

 Acaqcia, Inc provides for doubtful accounts based on 1 1/2% of credit sales

What is the balance of the allowance for doubtful accounts at December 31,
2016?

Source: Auditing Problems (Gerardo S. Roque)

3. Mahogany company’s analysis and aging of its accounts receivable at December

31, 2016, disclosed the following:
 Accounts receivable 460,000
 Accounts estimated to be uncollectible (per aging) 95,000
 Allowance for bad debts (per books) 103,000

What is the net realizable value of Mahogany’s receivables at December 31,

2016?

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Source: Auditing Problems (Gerardo S. Roque)

Moderate:

1. The following information is from Gumamela Corp.’s first year of operations:

a. Machine purchased 450,000
b. Ending merchandise inventory 123,000
c. Collections from customers 150,000
d. All sales are on account and goods
Sell at 30% above cost

What is the accounts receivable balance at the end of the company’s first year of
operations?

Source: Auditing Problems (Gerardo S. Roque)

2. Sunflower Company sells a variety of imported goods. By selling on credit,

Sunflower cannot expect to collect 100% of its accounts receivable. At December
31, 2016, Sunflower reported the following in its statement of financial position:
 Accounts receivable 2,197,500
 Allowance for doubtful accounts ( 133,500 )
 Accounts receivable, net 2,064,000

During the year ended December 31, 2016, Sunflower earned sales revenue of
537,702,500 and collected cash of 528,070,500 from customers. Assume bad
debts expense for the year was 1% of sales revenue and that Sunflower wrote off
uncollectible accounts receivable totalling 5,439,500. What is the accounts
receivable balance at December 31, 2016?

Source: Auditing Problems (Gerardo S. Roque)

3. (Refer to problem no. 2) What is the December 31, 2016, balance of the
 Allowance for Bad Debts account?

Source: Auditing Problems (Gerardo S. Roque)

Difficult:

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1. The following amounts are shown on the 2016 and 2015 financial statements of
San Francisco Co.:
2016 2015
 Accounts receivable ? 470,000
 Allowance for Bad debts 20,000 10,000
Net Sales 2,600,000 2,400,000
COGS 1,900,000 1,752,000

San Francisco Co.’s accounts receivable turnover for 2016 is 6.5 times. What is
the accounts receivable balance at December 31, 2016?

Source: Auditing Problems (Gerardo S. Roque)

2. The policy of ILANG-ILANG, INC. is to debit the bad debt expense for 3% of all
new sales. The following are the company’s sales and allowance for bad debts
for the past four years:
Year Sales Year-End Balance
2013 3,000,000 45,000
2014 2,950,000 56,000
2015 3,120,000 60,000
2016 2,420,000 75,000

What are the amounts of accounts written off in 2014, 2015, and 2016?

Source: Auditing Problems (Gerardo S. Roque)

3. Pilipinas hotel manages an extensive network of boutique hotels in the country.

The company has significant receivables from three customers, 250,000 due
from Tayuman hotel, 450,000 due from Malabon hotel, and 400,000 due from
Batangas hotel. Pilipinas hotel has other receivables totalling 225,000.

Pilipinas determines that receivables from Malabon hotel is impaired by 75,000

and the Batangas hotel receivables is impaired by 100,000. The receivables from
Tayuman hotel is not considered impaired. Pilipinas also considered that a

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composite rate of 5% is appropriate to measure impairment on all ther accounts

receivable.

 After recognizing the impairment loss, what amount of receivables should

Pilipinas hotel report in its statement of financial position?

Source: Auditing Problems (Gerardo S. Roque)

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GAGATAM, CHRISTIANETH N.
AUDITING PROBLEMS

EASY : VALIX

1. Jay company provided the following data relating to accounts receivable for the current
year:
Accounts receivable, January 1 650,000
Credit sales 2,700,000
Sales returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000

Q: What amount should be reported as net realizable value of accounts receivable on December 31?

2. Frame company has an 8% note receivable dated June 30, 2016, in the original amount of
₱ 1, 500,000. Payments of ₱500,000 in principal plus accrued interest are due annually on
July 1, 2017, 2018 and 2019.

Q: What is the balance of note receivable on July 1, 2017?

Q: In the June 30,2018 statement of financial position, what amount should be reported as a current
asset for interest on the note receivable?

3. Orr Company prepared an aging of accounts receivable on December 31, 2016 and
determined that the net realizable value of the accounts receivable was ₱2,500,000.
Allowance for doubtful accounts on January 1 280,000
Accounts written off as uncollectable 230,000
Accounts receivable on December 31 2,700,000
Uncollectable accounts recovery 50,000

Q: What amount should be recognized as doubtful accounts expense for t he current year?

MODERATE: VALIX

1. Appari Bank granted a loan to a borrower on January 1, 2016. The interest rate on the loan i s
10% payable annually starting December 31, 2016. The loan matures in five years on
December 31, 2020.
Principal amount 4,000,000

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Original fee received from borrower 350,000

Direct origination cost incurred 61,500
The effective rate on the loan after considering the direct origination cost incurred and
origination fee received is 12%.

Q: What is the carrying amount of the loan receivable on January 1, 2016?

Q: What is the interest income for 2016?

2. On January 1, 2016. Oceanic Bank made a ₱1,000,000, 8% loan. The ₱ 80,000 interest is
receivable at the end of each year, with the principal amount to be received at the end of five
years. At the end of 2016, the first year’s interest of ₱ 80,000 has not yet been received
because the borrower negotiated a restructuring of the l oan. The payment of all of the
interest for 5years will be delayed until the end of the 5 year loan term. In addition, the
amount of principal repayment will be dropped from ₱1,000,000 to ₱500,000.
The PV of 1 at 8% for 4 periods is .735. No interest revenue has been recognized in 2016 in
connection with the loan.

Q: What is the loan impairment loss on December 31, 2016?

3. On December 31, 2016, Macedon Bank has a 5year loan receivable with a face value of
₱5,000,000 dated January 1, 2015 that is due on December 31, 2019. Interest on the loan is
payable at 9% every December 31. The borrower paid the interest that was due on December
31, 2015 but informal the bank that interest accrued in 2016 will be paid at maturity date.
There is a high probability that the remaining interest payments will not be paid because of
financial difficulty. The prevailing market rate of i nterest on December 31, 2016 is 10%. The PV
of 1 for three periods is .772 at 9%, and .751 at 10%.

Q: What is the loan impairment loss to be recognized on December 31, 2 016?

DIFFICULT: ROQUE

Presented below are unrelated situations. Answer the questions relating to each situation.
1. ORCHIDS Company’s accounts receivable at December 31, 2016, had a balance of ₱ 1,200,000.
The allowance for bad debts account had a credit balance of ₱40,000. Net sales in 2016 were
₱6,704,000 (net of sales discounts of ₱56,000). An aging schedule shows that ₱150,000 of the
outstanding accounts receivable are doubtful.

Q: What is th adjusting entry for estimated bad debt expense?

2. The following selected transactions occurred during the year ended December 31, 2016:

Gross sales (cash and credit) 750,000

Collections from credit customers, net of 2% cash discount 245,000

Cash sales 150,000

Uncollectible accounts written off 16,000

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Credit memos issued to credit customers for sales returns and allowances 8,400

Cash refunds given to cash customers for sales returns and allowances 12,640

Recoveries on accounts receivable written off in prior years (not included in

cash received stated above). 5,421

At year end, the company provides for estimated bad debt losses by crediting the allowance
for Bad Debts account for 2% of its net credit sales for the year.

A. What is the company’s net credit sales in 2016?

B. What is the bad debt expense for 2016?

3. Coconut company estimates its bad debt expense to be 3% of net sales. The company’s
unadjusted trial balance at December 31, 2 016, included the following accounts:
DEBIT CREDIT
Allowance for bad debts ₱8,000
Sales 2,600,000
Sales returns and allowance ₱45,000

Q: What is the company’s bad debt expense for 2016?

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Dianna P. Pastrana

Easy

1. COCONUT CO. estimates its bad debt expense to be 3% of net sales. The company’s
unadjusted trial balance at December 31, 2016, included the following accounts:

Debit Credit

 Allowance for bad debts P8,000

Sales 2,600,000

Sales returns and allowances P45,000

What is the company’s bad debt expense for 2016?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S.

Roque, Problem 2-8, page 154)

2. Jay Company provided the following data relating to accounts receivable for the current
year:

 Accounts receivable, January 1 650,000

Credit Sales 2,700,000

Sales returns 75,000

 Accounts written off 40,000

Collections from customers 2,150,000

Estimated future sales returns at December 31 50,000

Estimated uncollectible accounts at 12/31 per aging 110,000

What amount should be reported as net realizable value of accounts receivable on

December 31?

(Practical Financial Accounting Volume 1 by Conrado Valix and Christian Aris Valix,
Problem 18-2, page 211)

3. Ladd Company provided the following data for the current year:
 Allowance for doubtful accounts- January 1 180,000

Sales 9,500,000

Sales returns and allowances 800,000

Sales discounts 200,000

 Accounts written off as uncollectible 200,000

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The entity provided for doubtful accounts expense at the rate of 3% of net sales.

What is the allowance for doubtful accounts at year-end?

(Practical Financial Accounting Volume 1 by Conrado Valix and Christian Aris Valix,
Problem 19-11, page 231)

Moderate

On January 1, 2014, MELON CORP. loaned P3,000,000 to Debtor Company. Under the loan
agreement, Debtor Company is to make an annual principal payment of P600,000 for 5 years
plus interest at 8%. The first principal and interest payment is due on January 1, 2015. The
required payments were made by Debtor Company for 2015 and 2016. However, during 2016,
Debtor Company began to face financial difficulties, requiring Melon Corp. to reevaluate the
collectability of the loan. On December 31,206, Melon Corp. determines that it will be able to
collect the remaining principal, but is unlikely that the interest will be collected.

The following present value factors are taken from the table of the present values:

Present value of 1 at 8% for:

1 period 0.92593

2 periods 0.85734

3 periods 0,79383

1. What is the present value of the expected future cash flows as of December 31, 2016?
2. What is the amount of loan impairment on December 31, 2016?
3.  Assuming that Melon Corp.’s assessment of the collectability of the loan has not
changed, what amount of interest income should be recognized for 2017?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque,

Problem 2-23, page 195)

Difficult

Problem 1: On January 2, 2016, a tract of land that originally cost P800,000 was sold by
Vietnam Rose Company. The company received a P1,200,000 note as payment. It bears
interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%.

The present value table shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132

Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity
Of 1 for 3 periods 2.48685

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1. What amount of gain on sale of land should be recognized on January 2, 2016?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque,

Problem 2-20, page 189)

Problem 2: YOKOHANA BANK loaned P5,500,000 to Bargain Company on January 1, 2016.

The initial loan repayment terms include a 10% interest rate plus annual principal payments of
P1,100,000 on January 1 each year. Bargain made the required interest payment in 2016 but
did not make the P1,100,000 principal payment nor the P550,000 interest payment for 2017.
Yokohana is preparing its annual financial statements on December 31, 2017. Bargain is having
financial difficulty, and Yokohana has concluded that the loan is impaired.

 Analysis of Bargain’s financial condition on December 31,2017, indicates the principal payments
will be collected, but the collection of interest is unlikely. Yokohana did not accrue the interest
on December 31, 2017.

The projected cash flows are:

December 31, 2018 P1,750,000

December 31, 2019 2,000,000

December 31, 2020 1,750,000

5,500,000

2. What is the loan impairment loss on December 31, 2017?

3. What is the interest income to be reported by Yokohana Bank in 2018?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque,

Problem 2-22, page 193)

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OSTULANO, ELGENEROSE B.

EASY:

1. In the December 31, 2018 statement of financial position of Mildred Company, the current receivables
consisted of the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts ( 20,000)
Claim against shipper for goods lost
In transit (November 2018) 30,000
Selling price of unsold goods sent by
Mildred on consignment at 130% of cost
(not included in Mildred’s ending inventory)   260,000
Security deposit on lease of warehouse
Used for storing some inventories 300,000
Total 1,500,000

On December 31, 2018, what total amount should be reported as trade and other receivables under current
assets?

2. The following information pertains to Jasmine Co.:

Credit sales for the year ended Dec 31, 2018 450,000
Credit balance in allowance for bad debts  – Jan 1, 2018 10,800
Bad debts written off during 2018 18,000

According to past experience, 3% of Jasmine’s credit sales have been uncollectible. After provision is made for bad
debt expense for the year ended December 31, 2018, the allowance for uncollectible accounts balance would be?

3. The following information pertains to Honey Co.’s accounts receivable at December 31, 2018:
Days Estimated Outstanding Amount % Uncollectible
0 – 60 120,000 1%
61 – 120 90,000 2%
Over 120 100,000 6%

During 2018, Honey wrote off P7,000 in receivables and recovered P4,000 that had been written off in prior years.
Honey’s December 31, 2018, allowance for uncollectible accounts was P22,000. Under the aging method, what
amount of allowance for uncollectible accounts should Honey report at December 31, 2018?

MODERATE:

1. Volter Company sold accounts receivable without recourse for P530,000. Volter received P500,000 cash
immediately from the factor. The remaining P30,000 will be received once the factor verifies that none of the
accounts receivable is in dispute. The accounts receivable had a face amount of P600,000. Volter had
previously established an allowance for bad debts of P25,000 in connection with these accounts. What is the
loss on factoring that will be recognized by Volter Company?

For questions 2 & 3:

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Sad Co. is a dealer in equipment. On December 31, 2018, Smile Co. sold an equipment in exchange for a
noninterest bearing note requiring five annual payments of P500,000. The first payment was made on December
31, 2019. The market interest for similar notes was 8%. The relevant present value factors are:

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

2. In its December 31, 2018 statement of financial position, what should Smile Co report as note receivable?
3. What interest income should be reported for 2019?

HARD:

For questions 1 –  3:

Smile Bank loaned P5,000,000 to Dream Company on January 1, 2017. The terms of the loan require principal
payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on
January 1, 2018. Dream Company made the required payments during 2018 and 2019. However, during 2019
Dream Company began to experience financial difficulties, requiring Smile to reassess the collectibility of the loan.
On December 31, 2019, Smile Bank has determined that the remaining principal payment will be collected but the
collection of the interest is unlikely. Smile Bank did not accrue the interest on December 31, 2019. The present
value of 1 at 8% is as follows:

For one period 0.926

For two periods 0.857
For three periods 0.794

1. What is the loan impairment loss on December 31, 2019?

2. What is the interest income to be reported by Smile Bank in 2020?
3. What is the carrying amount of the loan receivable on December 31, 2020?

Reference:
Practical Accounting One by Valix
Intermediate Financial Accounting Part 1A by Millan

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Harriet A. Ramos

 AUDITING PROBLEMS IN RECEIVABLES

EASY

Problem 1 (Practical Financial Accounting Volume 1, Valix, 2016 Edition pg. 210)

Roxy Company provided the following information relating to accounts receivable for the current
year:

 Accounts Receivable 1,300,000

Credit Sales 5,400,000
Collections from customers, excluding recovery 4,750,000
 Accounts written off 125,000
Collection of accounts written off in prior year
(customer credit was not reestablished) 25,000
Estimated accounts receivables per aging of
receivables at December 31 165,000

What is the balnce of accounts receivable, before allowance for doubtful accounts on December
31?

a. P 1,825, 000
b. P 1,850,000
c. P 1,950,000
d. P 1,990,000

Problem 2 (Practical Financial Accounting Volume 1, Valix, 2016 Edition pg. 212)

Infra Company provided the following data for the current year:

Sales on account 3,600,000

Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
 Accounts receivable written off 25,000
Purchases on account 3,900,000
Payments to creditors 3,200,000
Discounts allowed by creditors 260,000
Merchandise returned by customers 15,000
Collections received to settle accounts 2,450,000

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Notes given to creditors in settlement of accounts 250,000

Merchandise returned to suppliers 70,000
Payment on notes payable 100,000
Discounts taken by customers 40,000
Collections received in settlement of notes 180,000

What is the net realizable value of accounts receivable at year-end?

a. 605,000
b. 890,000
c. 825,000
d. 670,000

Problem 3 (Practical Financial Accounting Volume 1, Valix, 2016 Edition pg. 214)

On December 31, 2016, Miami Company reported that the current receivables consisted of the
following:

Trade accounts receivable 930,000

 Allowance for uncollectible accounts ( 20,000)
Claim against shipper for goods lost
in transit in November 30,000
Selling price of unsold goods sent by
miami on consignment at 130% of cost and
not included in Miami’s ending inventory   260,000
Security deposit on lease of warehouse
Used for storing some inventories 300,000
Total 1,500,000

On December 31, 2016, what total amount should be reported as trade and other receivables
under current assets?

a. 940,000
b. 1,200,000
c. 1,240,000
d. 1,500,000

MODERATE

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Problem 1 (Practical Financial Accounting Volume 1, Valix, 2016 Edition pg. 225)

Tara Company provided the following information pertaining to accounts receivable on

December 31, 2016:

Days Outstanding Estimated Amount Estimated uncollectible

0-60 1,200,000 1%

61-120 900,000 2%

Over 120 1,000,000 60,000

During the current year, the entity wrote off P 70,000 in accounts receivable and recovered P
40,000 that had been written off in prior years.

On January 1, 2016, the allowance for uncollectible account was P 100,000.

Under the aging method, what amount of allowance for uncollectible accounts should be
reported on December 31, 2016?

a. 190,000
b. 100,000
c. 130,000
d. 90,000

Problem 2 (Auditing Problems, Roque, 2016-2017 Edition, pg. 195)

On January 1, 2014, MELON CORP. loaned P 3,000,000 Debtor Company. Under the loan
agreement, Debtor Company is to make an annual principal payment of P 600,000 for 5 years
plus interest at 8%. The first principal and interest payment is due on January 1, 2015. The
required payments were made by Debtor Company for 2015 and 2016. However, during 2016,
Debtor Company began to face financial difficulties, requiring Melon Corp. determines that it will
be able to collect remaining principal, but it is unlikely that the interest will be collected.

The following present value factors are taken from the table of present values:

Present value of 1 at 8% for:

1 period 0.92593

2 periods 0.85734

3 periods 0.79383

What is the present value of the expected future cash flows as of December 31, 2016?

a. P 1,800,000
b. P 2,146,260
c. P 1,669,962
d. P 1,428,894

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Problem 3 (Practical Financial Accounting Volume 1, Valix, 2016 Edition pg. 242)

Sigma Company began operations on January 1, 2015. On December 31, 2015, the entity
provided for doubtful accounts based on 1% of annual credit sales.

On January 1, 2016, the entity changed the method of determining the allowance for doubtful
accounts by aging of accounts receivable.

Days past invoice date Percent uncollectible

0-30 1%
31-90 5%
91-180 20%
Over 180 80%

In addition, the entity wrote off all accounts receivable that were over 1 year old.

The following additional information related to the years ended December 31, 2016 and 2015.

2016 2015

Credit Sales 3,000,000 2,800,000

Collections, including recovery 2,915,000 2,400,000
 Accounts written off 27,000 none
Recovery of accounts previously written off 7,000 none

Days past invoice date at December 31

0-30 300,000 250,000
31-90 80,000 90,000
91-180 60,000 45,000
Over 180 25,000 15,000

1. What is the allowance for doubtful accounts on December 31, 2015?

a. 28,000
b. 24,000
c. 26,000
d. 0

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2. What is the allowance for doubtful accounts on December 31, 2016?

a. 30,000
b. 39,000
c. 29,150
d. 27,000

3. What amount should be reported as doubtful accounts expense for 2016?

a. 39,000
b. 31,000
c. 38,000
d. 11,000

DIFFICULT
Problem 1 (Auditing Problems, Roque, 2016-2017 Edition, pg. 146)
CALACHUCHI CORP.’s accounts receivable subsidiary ledger shows the following information:

 ACCOUNT BALANCE INVOICE

CUSTOMER DEC. 31, 2016 DATE AMOUNT
 Aruy, Inc. P 35,180 12/06/16 P 14,000
12/29/16 21,180
Naku Co. 20,920 09/27/16 12,000
08/20/16 8,920
Syak Corp. 30,600 12/08/16 20,000
10/25/16 10,600
Trip Co. 45,140 11/17/16 23,140
10/09/16 22,000
Uy Co. 31,600 12/12/16 19,200
12/02/16 12,400
Xak Corp. 17,400 09/12/16 17,400

The estimated bad debts rates below are based on Calachuchi Corp.’s receivable collection
experience.

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 Age of Accounts Rate

0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a debit balance of P 5,500 on December 31, 2016,
before adjustment.

1. The company’s accounts receivable under “61 – 90 days” category should be

a. P 32,600 c. P 44,600
b. P 44, 320 d. P 42,000

2. The company’s accounts receivable under “91 – 120 days” category should be
a. P 38,320 c. P 29,400
b. P 40,000 d. 12,000

3. The allowance for bad debts to be reported in the statement of financial position at
December 31, 2016, is
a. P 9,699 c. P 4,199
b. P 15,199 d. P 5,500

Problem 2 (Auditing Problems, Roque, 2016-2017 Edition, pg. 166)

The folloqing information is based on a first audit of SABILA COMPANY. The client has not
prepared financial statements for 2014, 2015, or 2016. During these years, no accounts have
been written off as uncollectible, and the rate of gross profit on sales has remained constant for
each three years.

Prior to January 1, 2014, the client used the accrual method of accounting. From January 1,
2014, to December 31, 2016, only cash receipts and disbursements records were maintained.

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When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2013.

 As a result of your examination, the correct data shown in the table below are available:

12/31/13 12/31/16
 Accounts Receivable balances:
Less than one year old P 15,400 P 28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P 16,600 P 33,000

Inventories P 11,600 P 18,800

 Accounts Payable for inventory purchased P 5,000 P 11,000

Cash received on accounts receivable in:

2014 2015 2016

 Applied to:
Current year collections P 148,800 P 161,800 P 208,800
 Accounts of the prior year 13,400 15,000 16,800
 Accounts of two years prior 600 400 2,000
Total P 162,800 P 177,200 P 227,600

Cash Sales P 17,000 P 26,000 P 31,200

Cash disbursement for inventory purchased P 125,000 P 141,200 P 173,800

1. The company’s sales revenue for the three -year period amounted to

a. P 658,200 c. P 625,400
b. P 74,200 d. P 415,300

2. What is the aggregate amount of purchases for the three-year period?

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a. P 131,000 c. P 434,000
b. P 440,000 d. P 446,000

3. What is the company’s gross profit ratio in each of the three -year period?

a. 33.33% c. 35.16%
b. 28.35% d. 31.15%

Problem 3 (Auditing Problems, Roque, 2016-2017 Edition, pg. 176)

PILIPINAS HOTEL manages an extensive network of boutique hotels in the country. The
company has significant receivables from three customers, P 250,000 due from Tayuman Hotel,
P 450,000 due from Malabon Hotel, and P 400,000 due from Batangas Hotel. Pilipinas has
other receivables totaling P 225,000.

Pilipinas determines that the receivable from Malabon Hotel is impaired by P 75,000 and the
Batangas Hotel receivable is impaired by P 100,000. The receivable from Tayuman Hotel is not
considered impaired. Pilipinas also determines that a composite rate of 5% is appropriate to
measure impairment on all other accounts receivable.

 After recognizing the impairment loss, what amount of receivables should Pilipinas Hotel report
in its statement of financial position?

a. P 1,325,000 c. P 1,150,000
b. P 1,126,250 d. P 1,137,500

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LARA, JIMEREZEL

Easy (From Practical Financial Accounting Volume 1 by Conrado T. Valix)

1) Problem 18-1 (AICPA Adapted)

IH8U Company provided the following information relating to accounts receivable for the current
year:

Accounts receivable on January 1 1,300,000

Credit sales 5,400,000

Collections from customers, excluding recovery 4,750,000

Accounts written off 125,000

Collection of accounts written off in prior year

(customer credit was not reestablished) 25,000

Estimated uncollectible receivables per aging of

receivables at December 31 165,000

What is the balance of accounts receivable, before allowance for doubtful accounts on December 31?

2) Problem 18-2 (AICPA Adapted)

Walwal Company provided the following data relating to accounts receivable for the current year:

Accounts receivable, January 1 650,000

Credit sales 2,700,000
Sales returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per
aging 110,000

What amount should be reported as net realizable value of accounts receivable on December 3 1?

3) Problem 18-5 (AICPA Adapted)

On December 31, 2018, Golden State Company reported that the current receivables consisted of
the following:

Trade accounts receivable 930,000

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Allowance for uncollectible accounts (20,000)

Claim against shipper for goods lost in transit
in November 30,000
Selling price of unsold goods sent by Miami on
consignment at 130% of cost and not included
in Golden State’s ending inventory 260,000
Security deposit on lease of ware house used for
storing some inventories. 300,000
Total 1,500,000

On December 31, 2018, what total amount should be reported as trade and other receivables under
current assets?

MODERATE (From Practical Financial Accounting Volume 1 by Conrado T. Valix)

1) Problem 18-6 (AICPA Adapted)

Hope Company provided the following information relating to current operations:

Accounts receivable, January 1 4,000,000

Accounts receivable collected 8,400,000
Cash sales 2,000,000
Inventory, January 1 4,800,000
Inventory, December 31 4,400,000
Purchases 8,000,000
Gross margin on sales 4,200,000

What is the balance of accounts receivable on December 31?

2) Problem 23-4 (AICPA Adapted)

On January 1, 2016, Gin Company sold goods to Kid Company. Kid signed a noninterest-bearing note
requiring payment of P600,000 annually for seven years. The first payment was made on January 1,
2016.

The prevailing rate of interest for this type of note at date of issuance was 10%.
Period Present value of 1 at 10% Present value of ordinary annuity of 1 at 10%
6 .56 4.36
7 .51 4.87

What amount should be recorded as sales reve nue in January 2016?

3) Problem 18-7 (PHILCPA Adapted)

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Jamaica Company revealed a balance of P8,200,000 in the accounts receivable control account at
year-end.

An analysis of the accounts receivable showed the following:

Accounts known to be worthless 100,000

Advance payments to creditors on purchase orders 400,000
Advances to affiliated entities 1,000,000
Customers’ accounts reporting credit balances
arising from sales returns (600,000)
Interest receivable on bonds 400,000
Trade accounts receivable-unassigned 2,000,000
Subscription receivable due in 30 days 2,200,000
Trade accounts receivable-assigned 1,500,000
Trade installements recivable due 1-18 months
including unearned finance charge of 50,000 850,000
Trade accounts receivable from officers, due currently 150,000
Trade accounts on which postdated checks are held
And no entries were made on receipt of checks 200,000
Total 8,200,000

What amount should be reported as tr ade accounts receivable at year-end?

DIFFICULT (Practical Financial Accounting Volume 1 by Conrado T. Valix)

1) Problem 24-1(IFRS)
Jolo Bank granted a loan to a bor rower on January 1, 2016. The interest rate on the loan is 10%
payable annually starting December 31, 2016. The loan matures in five years on December 31,
2020.

Principal amount 4,000,000

Origination fee received from borrower 350,000
Direct origination cost incurred 61,500

The effective rate on the loan after considering the direct origination cost incurred and
origination fee received is 12%.

What is the carrying amount of the loan receivable on January 2016?

What is the interest income for 2016?
What is the carrying amount of the loan receivable on December 31, 2016?

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2) Problem 24-2 (IFRS)

International Bank granted a loan to a borrower on January 1, 2016. The interest on the loan is
10% payable annually starting December 31, 2016 . The loan matures in three years on
December 31, 2018.

Principal amount 4,000,000

Origination fee charged against borrower 342,100
Direct origination cost incurred 150,000

After considering the origination fee charged against the borrower and the direct origination
cost incurred, the effective rate on the loan in 12%.

What is the carrying amount of the loan receivable on January 1, 2016?

What is the interest income for 2016?

3) Problem 25-3 (IAA)

On January 1, 2016, Oceanic Bank made a P1,000,000, 8% loan. The P80, 000 interest is
receivable at the end of each year, with the principal amount to be received at the end of five
years. At the end of 2016, the first year’s interest of P80, 000 has not yet been received because
the borrower is experiencing financial difficulties. The borrower negotiated a restructuring of
the loan.

The payment of all of the interest for 5 years will be delayed until the end of the 5-year loan
term. In addition, the amount of principal repayment will be dropped f rom P1, 000,000 to P500,
000.

The PV of 1 at 8% for 4 periods is .735. No interest re venue has been recognized in 2016 in
connection with the loan.

What is the loan impairment loss on December 31 , 2016?

What is the interest income for 2017?

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KIMBERLY LEDUNA

EASY

1. Nagmahal Company provided the following information relating to current operations:

Accounts Receivable, January 1 4,000,000

Accounts Receivable collected 8,400,000

Cash Sales 2,000,000

Inventory, January 1 4,800,000

Inventory, December 31 4,400,000

Purchases 8,000,000

Gross margin on sales 4,200,000

What is the balance of accounts receivable on December 31?

2. Nasaktan Company allowance for doubtful accounts was P1,000,000 at the end of 2016 and
P900,000 at the end of 2015.

For the year ended December 31,2016, the entity reported doubtful accounts expense of
P160,000 in the income statement.

What amount was debited to the appropriate account to write off uncollectible accounts in
2016?

3. On January 1,2016, Gumanda Company had a credit balance of 260,000 in the allowance for
uncollectible accounts. Based on past experience, 2% of credit sales would be uncollectible
accounts. Credit sales for the year totaled P9,000,000.

What is the uncollectible accounts expense for the year?

MODERATE

1. NakamoveON Company used the allowance method of accounting for uncollectible accounts.
During the current year, the entity had charged P800,000 to bad debt expense, and wrote off
accounts receivable of P900,000 as uncollectible.

What was the decrease in working capital?

2. WALANGFOREVER Company provided the following information per taining to accounts

receivable on December 31,2016:

Days outstanding Estimated Amount Estimated Uncollectible

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0-60 1,200,000 1%

61-120 900,000 2%

Over 120 1,000,000 60,000

During the current year, the entity wrote off P70,000 in accounts receivable and recovered P40,000 that
had been written off in prior years.

On January 1,2016, the allowance for uncollectible accounts was P100,000.

Under the aging method, what amount of allowance for uncollectible accounts should be reported on
December 31,2016?

3. At the end of first year of operations, BITTER Company had a net re alizable value of accounts
receivable of P5,000,000.

During the year, the entity recorded charges to bad debts expense of P800,000 and wrote off as
uncollectible accounts receivable of P200,000.

What is the year- end accounts receivable balance before the allowance for doubtful accounts?

DIFFICULT

1. OKAY-AKO Company accepted from a customer P100,000 face amount, 6-month, 8% note dated
April 15,2016. On the same date, t he entity discounted the note without recourse at a 10%
discount rate.

What amount of cash was received from t he discounting?

2. On July 1,2016, OKAYLANGTALAGA-AKO Company sold goods in exchange for P2,000,000, 8-

month, noninterest-bearing note receivable.

At the time of the sale, the market rate of interest was 12%. The entity discounted the note at
10% on September 1,2016.

What was the cash received from discounting?

3. On July 1,2016, OKAYNGALANG-AKO Company sold equipment to ANGKULIT-NYO Company for

P1,000,000. OKAYNGALANG-AKO accepted a 10% note receivable for the entire sales price.

This note is payable in two equal installments of P500,000 plus accrued interest on December
31,2016 and December 31,2017.

On July 1,2017, the entity discounted the note at a bank at an interest rate of 12%.

What is the amount received from t he discounting of note receivable?

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PETER NEIL B. MADJUS

FOURTH YEAR – BSA

RECEIVABLES

EASY

Problem 1. (Reynaldo R. Ocampo)

Your audit disclosed that on December 31, 2017, the accounts receivable control account of Alilem Co.
had a balance of P2,865,000. An analysis of the accounts receivable account showed the following:

Accounts known to be worthless P 37,500

Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customer’s accounts reporting credit balance
arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
Subscription receivable due in 30 days 825,000
Trade accounts receivable – assigned (Alilem Co.’s
equity in assigned account is P150,000) 375,000
Trade installment receivable due 1  – 18 months
including unearned finance charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 75,000
P2,865,000

Questions:
1. The trade accounts receivable as of Dec 31, 2017 is
a. P1,147,500 c. P1,485,000
b. P1,522,500 d. P1,447,500
2. The net current trade and other receivables as of December 31, 2017 is
a. P2,647,500 c. P2,272,500
b. P2,610,000 d. P1,822,500
3. How much of the foregoing will be presented under noncurrent assets as of Dec 31 , 2017?
a. P1,200,000 c. P 525,000
b. P 375,000 d. P 0

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Problem 2. (Reynaldo R. Ocampo)

Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are
available for 2017.

Credit sales during 2017 P 21,000,000

Allowance for doubtful accounts 1/10/17 170,000
Collection of accounts written off in prior ye ars
(customer credit was reestablished) 80,000
Customer accounts written off as uncollectible
during 2017 300,000

What is the balance in allowance for doubtful accounts at December 31, 2017?
a. P 630,000 c. P 500,000
b. P 420,000 d. P 580,000

Problem 3. (Reynaldo R. Ocampo)

The following accounts were taken from Cervantes Inc.’s statement of financial position at December
31, 2017.
Debit Credit
Accounts receivable P 4,1000,000
Allowance for doubtful accounts 100,000
Net credit sales P 7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for
2017?
a. P 123,000 c. P 223,000
b. P 23,000 d. P 225,000

MODERATE

Problem 1. (GERARDO S. ROQUE)

The following information is from GUMAMELA CORP.’s first year of operations:
1. Merchandise purchased P 450,000
2. Ending merchandise inventory 123,000
3. Collections from customers 150,000
4. All sales are on account and goods sell at
30% above cost.
What is the accounts receivable balance at the end of the company’s first year of operations?
a. P 275,100 c. P 257,200
b. P 290,500 d. P 257,100

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Problem 2. (Gerardo S. Roque)

On January 1, 2016, Waling-waling Co. sells its equipment with carrying value of P160,000. The
company receives a non-interest bearing note due in 3 years with a face amount of P200,000. There is
no establised market value for the equipment. The prevailing interest rate for a note of this type is 12%.
The following are the present value factors of 1 at 12%.

Present value of 1 for 3 periods 0.71178

Present value of an ordinary annuity of 1 for 3 periods 2.40183

1. What is the gain or loss to be recognized on the sale of the equipment?

a. P 17,644 c. P 18,044
b. P 20,200 d. P 16,406
2. What is the discount on note rec eivable on January 1, 2017?
a. P 57,644 c. P 55,644
b. P 55,330 d. P 57,330
3. What is the discount amortization at the end of the third year
(using the effective interest method)?
a. P 21,428 c. P 22,300
b. P 19,620 d. P 19,206

Problem 3. (Gerardo S. Roque)

On January 1, 2014, Melon Corp. loaned P3,000,000 to Debtor Company. Under the agreement, Debtor
Company is to make an annual principal payment of P600,000 for 5 years plus interest at 8%. The frst
principal and interest payment is due on January 1, 2015. The required payments were made by Debtor
Company for 2015 and 2016, Debtor Company began to face financial difficulties, requiring Melon Corp.
to reevaluate the collectibility of the loan. On December 31, 2016, Melon Corp. determines that it will
be able to collect the remaining principal, but is unlikely that the interest will be collected.

The following present value factors are taken from the table of present values:
Present value of 1 at 8% for:
1 period 0.92593
2 periods 0.85734
3 periods 0.79383

1. What is the present value of the expected future cash flows as of December 31, 2016?
a. P 1,800,000 c. P 1,669,962
b. P 2,146,260 d. P 1,428,894
2. What is the amount of loan impairment on December 31, 2016?
a. P 371,106 c. P 730,038
b. P 130,038 d. P 0

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DIFFICULT

Problem 1. (Gerardo S. Roque)

YOKOHANA BANK loaned P5,500,000 to BARGAIN CO. on January 1, 2016. The Initial loan repayment
terms include a 10% interest rate plus annual principal payments of P1,100,000 on January 1 each year.
BARGAIN made the required interest payment in 2016 but did not make the P1,100,000 principal
payment nor the P550,000 interest payment for 2017. Yokohana is preparing its annual financial
statements on December 31, 2017. Bargain is having financial difficulty, and Yokohana has concluded
that the loan is impaired.
Analysis of Bargain’s financial condition on December 31, 2017, indicates the principal payments will be
collected, but the collection of interest is unlikely. Yokohana did not accrue the interest on Dec. 31,
2017.

The projeced cash flows are:

December 31, 2018 P 1,750,000
December 31, 2019 2,000,000
December 31, 2020 1,750,000
P5,500,000

1. What is the loan impairment loss on Dec 31, 2017?

a. P 941,500 c. P 0
b. P 550,000 d. P 5,500,000
2. What is the interest income to be reported by YOKOHANA BANK in 2018?
a. P 501,435 c. P 455,850
b. P 326,435 d. P 550,000
3. What is the carrying value of the loan receivable on December 31, 2019?
a. P 1,590,785 c. P 3,264,350
b. P 1,750,000 d. P 4,558,500

Problem 2. (Reynaldo R. Ocampo)

You were able to obtain the following information from your audit of Magsingal Corporation’s Accounts
Receivable and Allowance for Doubtful Accounts:

 From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as of
December 31, 2010. Below is a transcript of the Allowance for Doutful Accounts:

Debit Credit Balance

January 1 – Balance P20,000
July 31 – Write-off P 16,000 4,000
December 31 – Provision P48,000 P52,000

 The summary of the subsidiary ledger as of Decem ber 31, 2010 was totaled as follows:
Debit balances:
Under one month P 360,000

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One to six months 368,000

Over six months 152,000
P 880,000

Credit balances:
Alien P 8,000 – Ok; additional billing in Jan., 2011
T. Twister 14,000 – should have been credited to Apol*
Dee Lah 18,000 – Advances on sales contract
*Account is one to six months classification
The customers’ ledger is not in agreement with the accounts receivable control. The client requested
you to adjust the control account to the subsidiary ledger after corrections are made.

 It is agreed that 1 percent is adequate for accounts under one month. Acco unts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are analyzed
as follows:
Definitely bad P 48,000
Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (estimated to be 90% collectible) 80,000
P152,000

1. How much is the adjusted balance of Accounts Receivable as of December 31, 2010?
a. P 818,000 c. P 832,000
b. P 846,000 d. P 826,000
2. How much is the adjusted balance of t he allowance for doubtful accounts as of December
31, 2010?
a. P 30,680 c. P 30,960
b. P 31,240 d. P30,760
3. How much is the Doubtful Accounts expense for the year 2010?
a. P 74,680 c. P 74, 960
b. P 75,240 d. P 74,760

Problem 3. (Reynaldo R. Ocampo)

The Vigan Company included the following in its notes receivable as of De cember 31, 2010:
Note receivable from sale of land P 880,000
Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

In connection with your audit, you were able to gather the following transactions during 2010 and other
information pertaining to the company’s notes receivable:

 On January 1, 2010, Vigan Company sold a tract of land. The land, purchased 10 years ago, was
carried on Vigan Company’s books at a value of P500,000. Vigan received a noninterest –
bearing note for P880,000. The note is due on December 31, 2011. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 10%.

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 On January 1, 2010, Vigan Company finished consultation services and accepted in exchange a
promissory note with a face value of P1,200,000, a due date of December 31, 2012, and a stated
rate of 5% with interest receivable at the end of each year. The fair value of the services is not
readily determinable and the note is not readily marketable. Under the circumstances, the note
is considered to have an appropriate imputed rate of interest of 10%.

 On January 1, 2010, Vigan Company sold equipment with a carrying amount of P1,600,000 to X
company. As payment, X gave Vigan Company a P2,400,000 note. The note bears an interest
rate of 4% and is to be repaid in three annual installments of P800,000 (plus interest on
outstanding balance). The first payment was received on December 31, 2010. The market price
of the equipment is not reliably determinable. The prevailing rate of interest for notes of this
type is 14%.

Questions: (Round off present value factors to four decimal places and final answers to nearest
hundred)

1. The consultation service fee revenue that should be recognized in 2010 is

a. P1,050,800 c. P 901,600
b. P1,095,800 d. P1,200,000
2. The gain on sale of equipment that should be re cognized in 2010 is
a. P331,600 c. P412,400
b. P257,280 d. P800,000
3. The noncurrent notes receivable as of December 31, 2010 is
a. P2,605,706 c. P2,494,000
b. P1,825,800 d. P2,625,700
4. The current portion of long term notes receivables as of December 31, 2010 is
a. P1,600,000 c. P1,468,200
b. P1,680,000 d. P 800,000
5. The interest income to be recognized in 2010 is
a. P464,000 c. P459,500
b. P435,800 d. P156,000

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REPOLLO, RENZ A.

EASY

1. Orr Company prepared an aging of accounts receivable on December 31, 2018

and determined that the net realizable value of the accounts receivable was ₱
2,500,000.

 Allowance for doubtful accounts on January 1 280,000

 Accounts written off as uncollectible 230,000
 Accounts receivable on December 31 2,700,000
Uncollectible accounts recovery 50,000

What amount should recognized as doubtful accounts expense for the current
year? (Problem 19-1, Practical Accounting 1, Valix, 2016)

2. At the first year of operations, Water Company had a net realizable value of
accounts receivable of ₱ 5,000,000.

During the year, the entity recorded charges to bed debt expense of ₱ 800,000
and wrote of as uncollectible accounts receivable of ₱ 200,000.

What is the year-end accounts receivable balance before the allowance for
doubtful account? (Problem 19-5, Practical Accounting 1, Valix, 2016)

3. Seiko Company reported the following balances after adjustments at year-end:

2018 2017
 Accounts Receivable 5,250,000 4,800,000
Net Realizable Value 5,100,000 4,725,000

During 2018, the entity wrote off accounts totalling ₱ 160,000 and collected ₱
40,000 on accounts written off in previous year.

What amount should be recognized as doubtful accounts expense for the year
ended December 31, 2018? (Problem 19-2, Practical Accounting 1, Valix, 2016)

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MODERATE

1. Tara Company provided the following information pertaining to accounts

receivable on December 31, 2018:

Days Outstanding Estimated Amount Estimated Uncollectible

0-60 1,200,000 1%
61-120 900,000 2%
Over 121 1,000,000 60,000

During the current year, the entity wrote off ₱ 70,000 in accounts receivable and
recovered ₱ 40,000 that had been written off in prior years.

On January 1, 2018, the allowance for uncollectible accounts was ₱ 100,000.

Under the aging method, what amount of allowance for uncollectible accounts
should be reported on December 31, 2018? (Problem 19-6, Practical Accounting
1, Valix, 2016)

2. Beach Bank loaned Boracay Company ₱ 7,500,000 on January 1, 2014. The

terms of the loan were payment in full on January 1, 2018 plus annual interest
payment at 11%. The interest payment was made as scheduled in January 1,
2015. However, due to financial setbacks, Boracay Company was unable to
make the 2016 interest payment. Beach Bank considered the loan impaired and
projected the cash flow from the loan on December 31, 2015. The bank accrued
the interest on December 31, 2015, but did not continue to accrue interest for
2016 due to impairment of the loan. The projected cash flows are:

Date of cash flow Amount projected on Dec. 31, 2016

December 31, 2017 500,000
December 31, 2018 1,000,000
December 31, 2019 2,000,000
December 31, 2020 4,000,000

The PV of 1 at 11% is 0.90 for one period, 0.81 for two periods, 0.73 for three
periods, and 0.66 for four periods.

What is the loan impairment loss on December 31, 2016? (Problem 25-1,
Practical Accounting 1, Valix, 2016)

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3. On December 31, 2016, Macedon Bank has 5 year loan receivable with a face
value of ₱ 5,000,000 dated January 1, 2015 that is due on every December 3 1,
2019. Interest on the loan is payable at 9% every December 31.

The borrower paid interest that was due on December 31, 2015 but informed the
bank that interest accrued in 2016 will be paid at maturity date.

There is high probability that the remaining interest payment will not be paid
because of financial difficulty.

The prevailing market rate of interest on December 31, 2016 is 10%. The PV of 1
for three periods is 0.772 at 9% and 0.751 at 10%.

What is the loan impairment loss to be recognized on December 31, 2016?

(Problem 25-4, Practical Accounting 1, Valix, 2016)

DIFFICULT

1. On December 31, 2016, Oregon Bank recorded an investment of ₱5,000,000

in a loan granted to a client. The loan has a 10% effective interest rate
payable annually every December 31. The principal is due in full maturity on
December 31, 2019.

Unfortunately, the borrower is experiencing significant difficulty and will have

difficult time in making full payment.

The bank projected that the entire principal will be paid at maturity date and
4% interest of ₱200,000 will be paid annually on December 31 of the next
three years. There is no accrued interest on December 31, 2016.

The present value of 1 at 10% for three periods is 0.75 and the present value
of an ordinary annuity of 1 at 10% for the three periods is 2.49.

a. What is the loan impairment loss for 2016?

b. What is the interest income for 2017?
c. What is the carrying amount of the loan receivable on December 31,
2017? (Problem 25-6, Practical Accounting 1, Valix, 2016)

2.  An aging of Maligaya Campany’s accounts receivable on December 31, 2012,

reveals the following information:

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  Time Outstanding Amount of Account Receivables

Under 30 days ₱  80,000
30-60 days 16,000
61-120 days 12,000
121-180 days 8,000
Over 180 days 4,000
Total ₱ 120,000

Based on past experience, the company believes that the following

uncollectible percentages are appropriate: under 30 days, 1.5%; 30-60 days,
3%; 61-120 days, 15%; 121-180 days, 30%; Over 180 days, 60%.

Instructions:
Using the aging of accounts receivable variation of the balance sheet
approach, prepare the adjusting entry on December 31, 2012 to record
estimated bad debts, assuming that the balance in the Allowance for Doubtful
 Accounts before adjustments is:
a. 440 Cr
b. 560 Dr
(VI – 13, Auditing Problems, Cabrera, 2012-2013)

3. Harding Corp. operates in an industry that has a high rate of bad debts. On
December 31, 2012, before any year- end adjustments, Harding’s Accounts
receivable balance was ₱6 00,000 and its Allowance for doubtful accounts
balance was ₱25,000. The year -end balance reported in the statement of
financial position for the Allowance for doubtful accounts will be based on the
aging schedule shown as follows:

Time Outstanding Amount of A/R Probability of Collection

Under 15 days ₱ 300,000 0.98
16-30 days 200,000 0.90
31-45 days 50,000 0.80
46-60 days 50,000 0.70
61-75 days 10,000 0.65
Over 75 days 10,000 0.00

Instructions:
a. What is the appropriate balance for Allowance for Doubtful Accounts on
December 31, 2012?
b. Show how the accounts receivable would be presented on the balance
sheet on December 31, 2012.
(VI – 14, Auditing Problems, Cabrera, 2012-2013)

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Goden, Vincent Louise B.

Auditiing Problems (easy)

1. Ladd Company provided the following information for the current year:

Allowance for doubtful accounts- Jan 1 180,000

Sales 9,500,000

Sales return and allowances 800,000

Sales Discounts 200,000

Accounts written off 200,000

The entity provided for doubtful accounts expense at the r ate of 3 % of net sales. What is the
allowance of doubtful accounts at year-end?

2. Barr company showed the following at year end:

Allowance for doubtful accounts 16,000 dr

Net Sales 7,100,000

The entity estimated its uncollectible receivables at 2% of net sales. What is the allowance for doubtful
accounts at year-end?

3. Effective with the year ended Dec 31, Hall co. adopted a new accounting met hod for estimating
the allowance for doubtful accounts at the amount indicated by the year-end aging of accounts
receivable. The following data are available:

Allowance for doubtful accounts, Jan. 1 250,000

Provision for doubtful accounts during the current year

(2% of credit sales of 10,000,000) 200,000

Accounts written off 205,000

Estimated uncollectible accounts per aging on Dec. 31 220,000

After year-end adjustment, what is the doubtful account expense for current year?

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Moderate

4. Roth Co. received from a customer a one year, 500,000 note bearing annual interest of 8%. After
holding the note for six months, the entity discounted the note without recourse at 10%

What amount of cash was received from the bank?

5. Star Co. assigned 4,000,000 of accounts receivable as collateral for a 2,000,000 6% loan with
bank. The entity also paid a finance fee of 5% on the transaction upfront.

What amount should be recorded as a gain or loss on the transfer of ac counts receivable?

6. Brooked Co. discounted its own 5,000,000 one-year note at a discount rate of 12%, when the
prime rate was 10%. In reporting the note prior to maturity.

What rate should be used for the recording of interest expense?

Difficult

7. Appari Bank granted a loan to a borrower on Jan 1 2013. The interest rate on the loan is 10%
payable annually starting Dec 31, 2013. The loan matures in 5 years on Dec 31, 2017. The data
related to the loan are:

Principal amount 4,000,000

Direct origination cost 61,500

Origination Fee received from a borrower 350,000

The effective interest rate on the loan after considering the direct origination fee received is 12%

What is the carrying amount of the loan receivable on Jan 1, 2013

8. On Dec 1, 2013, Nicole Co. gave Dawn Co a 200,000, 12% loan. Nicole Co. paid Proceeds of
194,000 after deduction of 6,000 non -refundable loan origination fee. Principal and interest are
due in 60 monthly installments of 4,450, Beginning Jan 1 20114. The prepayments yield an
effective interest rate of 12% at present of 200,000 and 13.4% at a present value of 194,000.

What amount should be reported as accrued interest receivable on Dec 31, 2013?

9. On Dec 31, 2013, Oregon Bank recorded an investment of 5,000,000 in a loan granted to a
client. The loan has a 10% effective interest rate payable annually every Dec 31. The principal is
due a t maturity on Dec. 31, 2016. Unfortunately, the borrower is experiencing significant
financial difficulty in making payments. The projected that the entire principal will be paid at

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Receivables - Auditing Problem

BS Accountancy (Batangas State University)

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Exercise 3
Required:
1. Journal Entry

Items Debit Credit

Accounts Receivable (Trade) P 15,000
Accounts Receivable (Officers) 3,600
Ordinary Shares Subscriptions Receivable 12,000
Advances to Employees 1,800
Notes Receivable (Trade) 6,000
Deposit to Guarantee Contract Performance 5,000
Utility Deposit 500
Receivables P 44,400

2. Statement of Financial Position

Current Assets:
Accounts Receivable (Trade) P 15,000
Accounts Receivable (Officers) 3,600
Advances to Employees 1,800
Deposit to Guarantee Contract Performance 5,000

Non-Current Assets:
Notes Receivable (Trade) 6,000
Utility Deposit 500

Current or Non-Current Assets:

Ordinary Shares Subscriptions Receivable 12,000
Deposit to Guarantee Contract Performance 5,000

Exercise 4
Required:

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GABE COMPANY
Statement of Comprehensive Income Effect
For the Year Ended December 31, 20X6

Expenses resulting from accounts receivable

(P200,000 * 85% * 3% + 10,000) P 15,100
Expenses resulting from accounts receivable sold
(P300,000 – P260,000) 40,000
Total expenses P55,100

Expenses resulting from accounts receivable

Accounts Receivable P 200,000
X 85%
Advances P 170,000
X 3%
P 5,100
Interest expense 10,000
Total P 15,100

Problem 3
Required:
A.
Inspect the customer's account as well as the record of cash receipts, purchase orders,
client's shipping documents, and sales invoices for collections made after the confirmation date.
Yael Specialty Manufacturing, perform analytical procedure through examining all
documentation regarding how the extended credit sales were given and consider confirming the
extended term.
Hello Combonitics, examine evidences and securities to prove the existence of the
special term. Confirm the term and make a summary of results of confirmation which includes
the investigation and all pertinent information.
Bea Dam Electronics, evaluate financial statement presentation and disclosure of
receivables.
To assess whether receivables are reported in the correct accounting period, measure
cutoff sales and sales returns. This would be a method of thoroughly reviewing the statement of
financial position in order to avoid fake revenues being reported at year-end. (Colleen Hi-Fi and
Ben Specialties).
Examine the collectability of the accounts and the adequacy of the allowance for
doubtful accounts. The auditor will search for past-due accounts receivables and credit ratings.
Allow for estimated losses on accounts that the auditors believe are uncollectible. Consult with
the client's legal representative. Examine proof for any amounts that might be uncollectible.
(Cely Electronics and Will Pipeline).

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Provide reasonable assurance that the financial statement is free from material
misstatement as a whole.

B.
For the aging of customer accounts, the auditor should be calculating possible credit
losses, monitoring the confirmation request and obtaining a schedule of aging accounts
receivable. The auditor would examine the foundations, as well as the aging of existing and
past-due accounts.
If the confirmation procedures are completed prior to the year-end, the auditor must
review the transactions between the date of confirmation and the declaration of financial status
to consider any accounts with significant balances that he or she finds unusual.
Contracts, consumer purchase orders, copies of sales invoices, and shipping advices
can also be used to support the underlying transactions. This can be accomplished by reviewing
all actual notes, counting cash, and examining securities. If any of the notes are owned by a
third party, the auditor should give the holder of the note a confirmation.
The auditor should compare important account statistics in order to identify possible
deficiencies in the client's collection efforts that may impact overall collectability. A test of the
sales cut-off may be conducted at any time to ensure that the company's procedure is sufficient.
Consult with the client's legal advisor. Check the aging schedule for past-due accounts
receivables that have not been paid since the declaration of financial position date. Consider
confirmations.
Create a list of accounts that are deemed unlikely to be collected in a working paper. List
customer names, unusual numbers, and explanations for suspicion. Examine the minutes of the
board of directors' meeting and obtain written client representations. Confirm any sale or
assigning of accounts receivable with the banks.

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Tutorial Solution - Auditing receivables - KH

Concepts In Biochemistry And Microbiology (Universiti Malaya)

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Auditing receivables – Tutorial Solutions

Question 1

Refer to lecture material.

Question 2

 Materiality = 0.005 x £36m = £180,000. Both the receivables balances in relation to market
traders and garden centres are material, and hence both must be tested.

 Since both customer types are quite different, we should ensure we test across both
populations.

Procedures

1) Reconcile the detailed breakdown of balances to the financial statement balance

- Can confirm that this is fine, the FSs show a balance for receivables of £5,600k and the
breakdown shows the same. This also agrees to the total of the aged receivables listing.

2) Perform a positive receivables circularisation of a representative sample of the company’s

year end balances (verifies existence and valuation).
- It is unlikely that sending this confirmation to Garden Centre B will be of any use in light of
the dispute; however, the other confirmations should be from a sample of both market
trader customers and other garden centre customers.

3) Review after date cash receipts from bank statements and match these to pre year end
receivable balances (verifies existence and valuation).
- Bank statements for July (and if possible August) 20X9 should be obtained and the
receipts from customers should be matched to the outstanding receivables balances.
- Market traders should pay in the month following the sale (so the June receivables
balances should be paid in July).
- Garden centre customers should pay 2 months following the sale (May receivables
balances (still o/s in June) should be paid in July, and June receivables balance should
be paid in August.

4) Review a sample of post year end credit notes to identify any that relate to pre year end
transactions to ensure that they have not been included in receivables.
- Since we have no details of Gazebo’s credit notes we must enquire with management
about whether any have been issued.
- Also look for GRNs after the year end in relation to returns.

5) Select a sample of goods despatched notes (GDN) before and just after the year end and
follow through to the sales invoice to ensure they are recorded in the correct accounting
period (cut-off).
- A breakdown of sales for the month of June X9 should be obtained (for both market
trader and garden centre customers) and a sample of these should be selected and
traced to GDN to confirm that the sale took place before the year end.

6) Inspect the aged receivables report to identify any slow moving balances, discuss these with
the credit control manager to assess whether an allowance or write down is necessary.
- On inspection of the aged receivables report, it is apparent that some balances are
overdue, these being:

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Customer 31-60 days 61-90 days 90+ days

£’000 £’000 £’000
Market trader 1 - - -
Market trader 2 £250 £100 -
Market trader 3 £20 - -
Market trader 4 £100 - £10

- Since these market trader balances are over their 30 day credit terms they are identified
as a concern and require further investigation.

- We should enquire with management whether there is a good reason for these balances
being delayed for payment, or establish whether there is any reason to doubt the
recoverability of these balances that may lead to an audit adjustment to either allow for,
or write off, the debt in each instance.

Customer 61-90 days 90+ days

- £’000 £’000
Garden centre A £100 -
Garden centre B £600 £290
Garden centre C - -
Garden centre D - -
Garden centre E - -
Garden centre F £50 -

- Since these garden centres customer balances are over their 60 day credit terms they
are identified as a concern and require further investigation.
- From the board minutes we can see that the balance with Garden Centre B is being
disputed – this must be followed up with the client, and ultimately if the auditor believes
that the balance is irrecoverable then and audit adjustment to write off the entire £890k
debt must be proposed.
o NB this balance is material (>180k) therefore if the client refuse to write off the
debt on the auditor’s request then this may impact the audit opinion given (see in
a later lecture!).
- Other balances with Garden Centres A and C should also be discussed with
management – we must establish whether there is a good reason for these balances
being delayed for payment, or establish whether there is any reason to doubt the
recoverability of these balances that may lead to an audit adjustment to either allow for,
or write off the debt in each instance.

7) Calculate average receivable days and compare this to prior year, investigate any significant
differences.
- For market trader customers:
£1,600
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑑𝑎𝑦𝑠 = ( ) 𝑥 365 𝑑𝑎𝑦𝑠 = 49 𝑑𝑎𝑦𝑠
£12,000

This is significantly higher than the credit terms offered of 30 days and may suggest an
area of concern collecting balances owed by this type of customer.
May be as a result of poor internal controls and something we can mention in the
management letter?

- For garden centre customers

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£4,000
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑑𝑎𝑦𝑠 = ( ) 𝑥 365 𝑑𝑎𝑦𝑠 = 61 𝑑𝑎𝑦𝑠
£24,000

This is reasonably in line with the 60 day credit terms offered and does not highlight any
cause for concern.

8) Review board minutes to assess whether there are any material disputed receivables that
may require write off.
- Discussed previously with the aged receivables listing – Garden Centre B’s balance is of
concern and may require writing off.

9) Review the reconciliation of the sales ledger control account to the sales ledger list of
balances.

10) Select a sample of year end receivable balances and agree back to valid supporting
documentation of GDN and sales order.

11) Review the sales ledger for any credit balances and discuss with management whether these
should be reclassified as payables.

12) As one of the market traders has an account balance in Euros:

- Retranslate a sample of outstanding invoices from that customer to verify mathematical
accuracy and the valuation of the balance.
- Agree the foreign exchange rate used to a third party, reputable source to verify the
valuation of the balance.

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