Resa The Review Schoo! of Accountancy AUDITING PROBLEMS Tel, No, 735-9807 & 734-3089 TRENEO/ESPENILLA AUDITING PROBLEMS PREWEEK MATERIALS ‘The CPA Board Examination Syllabus for AUDITING, Cifective May 2019 Examinations AUDITING THEORY 1.0 Fundamentals of Auaiting and Assuran’® Serves 1 Introduction to assurance argagerert T.-L Nature, object and elervents Ty. Types of agsurance engacem ants (audits, reviews, other assurance engagements) 1.1.3 ASsurance service vie avs attestation services 1.2 tnvroduction te auciting TZL Nature, phiascohy, ana objectives 1.2.2 Tyaes of aucn 1.2.2.1 According auc, ‘and eomeance ausit) 12.2.2 Recording “9 types of aaa internal audit, v4 goverment a 2.0 The Financial Statements Audit Clin’ scceptance, Aud 21 Overview of the 2udit process 3.2 Pre-engagement procedure 23 Scope and purposes of audi planning 2.3.1 Essential planning requirements 2.3.1.4 Krewledge othe business 25.1.2 Preliminary anabal procedures 23.1.5 Marenality 23.1.4 asseseing and managing audit risks SS.115 Overall oud pian ant duct program (experts, internal audteer, other Independent avdito"s) 24 Direction, supervision and reviews 3.0 Understanding the Entity and t= 1 ronment tachvsing Material Mistatement Semtjuery, regulatory end othe: externa’ fa:tors, cluding the applicable financial reporting framework: 3.1 4 Nature ofthe entity 3.1.2 Objectives and strategies ari related business risks 31.3 Measurement arg review of the entity's financial performance 3.2 Internal contro! 32.1 este concepts anc elements cf internal contro! 32: Consigeraton of ececunting anc rternal contrc! systems 322 | understanaing and documentation 312.2.2 Assesement of contzol risks 3.2.2.2 | Test of controls 3.21.24 Documentation 3.3 Assessing the nsks of materia’ mustatement Sood Fraud ana errors S32 isk attessment proceaures 3.3.3 Disewssion arvorg the engagement tear 3.3.4 Significant risks that require special audx consideration 35:5 Rigs for which substantive procedures alcre do not proyide sufficient appropriate aucit evidence 5.3.6 Revision of rsh assessment 4.4 Commemicating with those charged wh goversance and management 4.0 Audit Objectives, Procedures, Evidences and Sncumentation 44.1 Nature and significance 4.2 Evcencal matters 3 Augie procedures/techmaues ' 2.4 Avot working Depers 5.0 Completing the Audit) Post-Audit Responsibities B.1 Completing the audk and avait report preparation 5.1.1 analytical procedures for overall review 5.1.2 Related party transactions 5.1.3 Subsequent events review E14 Assesement of going concern assumotion 3.1.5 Obtaining clents “epresentatior. utter 5.1.6 Evaluating hnaing’, formulating en agnor and draRing the audit report 5.2 Post-auaie responsibiives 5.2.1 Subsequent discovery of facts 5.2.2 Subsequent discovery of omitted procedures 6.0 Reports on Audited Financial Statements 6.1 The unqualified auditor's report 6.2 Basic elements of the unqualified auditor's report 16.3 Modified auctor’ report 2.1 Matters that do net affect the auditor's opinion 6.3.2 Matters that de affect the auditors apinion 6.4 Report on comparatves 7.0°Auditing n'@ Computerized info: ation Syscer (C15) Environment Git internal control in a CIS envonzen ature of assertion’ data (Financial statements audit, operational (external independent financial statements audit, fanning, Supervision and Monitoring tts Internal Control ang Assessing the Risks ofRgSA: The Review School of Accountancy Page 2 of 28 2.1.1 Introduction 7.12 Impact of computers on accounting and internal control systems 7a. 2.1 General controls 7.1.2.2 Application controls 7.3.3 Unique characteristics of specific CIS 75.3.1 Stans alone 7.1.3.20nine 7.1.3.3 Database system 7.2 Basie approach to the audit of CIS environment $2 Introduction 7.2.2 Etfects of computers on the auat process. 7.2.3 Computer assisted audit techniques 18.0 Other Assurance and Non-assurance Services 1 Procedures and reports on special purpose auait engagements 8.1.1 General considerations 8.1.2 Audi of nancial statements prepared in accordance with a comprehensive basis of ‘accounting other than GAAP in the Phitpoines 8.1.3 AUGK of a component of financial statements 8.1.4 Reports on compliance mith contractual agreements 8.1.5 Reports on summarized financial statements 8.2 Nomauett engagements: procedures ang reports 18.2.1 Examination of prospective financial information 8.2.2 Engagements to review Rnancial statements 8.3 Nonassurance engagements. Be eapspemente to perform agieed-upen procedures regarding financial information 18.3.2 Engagements to comale financial information 9.0 Updates on Special Concerns. '9:1 Globalization 5.2 Bigtal and Information Technology 8.3 Governance and Ethics 94 Regulatory Requirements and Considerations 9,5 Effective Business Communication See ee accumulation and Evaluation - Substantive Tests of Transactions and Balances Tet Audit of the revenue and recerpt cycle a1 Augie of sales and revenue vransactions 112 Audit of receivable balances 1.2 Audit of expenaiture and disbursement cycle 12.1 Audit of acquisitions and purchases 1.2.2 auot of payroll transactions: £23 Aualt of ventory balances 13.4 Auait of trade payable batences 1218 Audit of prepala expenses and accrued lapities 1.3 Audit of production cycle 13.1 Audit of conversion activities 1312 Audet of inventory balances: work-In-process and fished goods 13.3 Audit of cost of goods sold balance 1.4 Augit of the financing cycle {4.1 Audit of financing cycle transactions 1412 Audit of non-trage labity balances 114.3 Audit of interest expense and finance cost balances 11414 Audit of equity accounts 1.5 Audit of investing cycle 1.5.1 Audit of vesting transactions 115.2 Audit of investment account balances 115.3 Audit of property, plant and equipment account balances 115.4 Audit of ineangible account balances 1.6 Auait of cash balances 1.6.1 Audit of ea3n receipt transactions balance 1.6.2 Audit of cash disbursement transactions Balance ‘RUDTTING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENILLA)RgSA: The Review School of Accountancy Page's of 26 PROBLEM 1: AUDIT OF THE REVENUE AND RECEIPT CYCLE £,- Sending accounts receivable confirmation jetters to the client's customers | consistent with the auditor's ‘objective of validating clent’s receivable assertion on: ‘8 Completeness and valuation b. Completeness and rights c)_ Existence and valvation 6. . Existence and rights 2. Which of the following situations would warrant the use of 2 positive confirmation letter rather than & idence regerding a cient’s accounts receivable balance? fables 1s Below the maximum, thus the auditor expects litle to no ‘a Interal control risk pve misstatement in accounts receivat!e: . Accounts receivable comprise of few customer accounts with relatively arge balances. C_ There were no significant exceptions noted in the prior year audit of the same client's account receivable baiance. 4. Alot the situations above war-ant the use of a positive confirmation letter 13. What action should the auditors take if @ reply to 2 positive confirmation request letter for 2 material amount iS not received from the customer within two oF three weeks of being sent out? ‘a. Qualify the audit opinion due te lack of sufficient appropriate audit evidence 1B Inform the entity's internal audit aepartment. Selon second equet toe aoe Qualify the audit opinion Zue t0 material misstatement in the financial statement. perform for year-end accounts confirmations 4. Which of the following procedures would an auditor most likely 1 ah re neque foyer latin the auditor oid not receive replins to second request? ‘o. Review the cach receist journal for the month prior to year-end. oobi nance avery malet BRS Sakis arinsernt conver concerning he revenue ev EO sy bets Oe ey ee or rahe enmtarce eierton. Y= wlty Sra aera Scents documenting the merchandise so to cstomers ‘5. Which ofthe following ts correct statement regarding the use of @.negative confirmation request? ‘Unrewurned negative confirmation requests rarely provide significant explicit evidence cine ‘Negative confirmation requests are effective wien detection risk is fow. ont Aen rr Unrewmes neaive conrieton guest cave tat atemat procedures ae neces secmeie antignavon requsct ara eMsct.-e when uncerstaterent ip ACCOUNE BOIBNCES BE oer semen tate suspected, 16. Under which ofthe feliowing crcumstarces would the use of the biank fram of confirmations of ACCOUMES ge fawn AIP ravervable most lily be preferable t9 pestive confirmation? fr 2. "Subsequent cash receipts are usualy aficu to vert, : 2 The recteres are likely to sign the confirmabons without devoting proper attention to them. €._ Analytical procedures indicate that few excepuons are expected. owl 6. The combined assessed level of innerent rsk and control risk i iow. 7. Which of thé following pepulatons shod the aucttor start form when testing forthe completeness of cee ee timanctacuning company and to ascertain that all valid sales are appropriately billed to Cietomers and are ultimately recorded 28 sales? - a Sales receipts oc ages CO & Sates. Sarce docs —? Rework Goods aispatch notes: /Dewery Pree : 16. Sales records or invoices should be tracta back to and compared with shipping documents to: Pr tscertain that all recorded sales pertain to goods that are actualy delivered to customers. 1. Enfure that shipments to custorners ore ile. v z Determine whether payments are properly applied to custemer accounts: Braance “eweing &. Deterine whether unt prices billed are in accordance with sales contracts, Reurd + Soutce 4265 9, The auditor wants to obtain evicence in support to the fihancal statement assertion of occurrence of sales Tncacvons and the corresponding existence of the related recelvable balance. The audor would most Ikely {0 which ofthe following substantive test procedure? ns Trace the shipping documents and sales Invoices to the entry inthe’ sales journal. 3: Trace the approved customer orders to the shipping documents and the sales invoices t €. Trace the sales Invoice to the daly cales summary. Trace back journal entries to the sales journal to the sales involce and shipping documents. 10. As part of auditing the company’s revenue/reckipt cycle, the auditor decided to render a sales cut-off by | rating entries several Jays belore and afer the balance sheet date from the company's sales Journal to the Soures documents which Include the sales order, the sales invoice and the delivery recelpt. Which of the following is correct regarding the sales cut-off procodures? 7. Gouening entries several days before the Balance sheet date to the source documents Is necessary to gather evidence Fegercing completeness assertion of receivables while VeUthiAg “AUDErIWa PRONLAMS = PREWEEK MATERIALS” (IRENTO/ESPERTLIA) 702 . eo aSA: The Review School of Accountancy Page 4 of 28 amony = C ther Deena -E ‘enivies several days ater the balance sheet date to the source documents is necessary (9 0 Slidence regarding the existence assertion of receivables ose ‘omries several days before end after the balance sheet date to the source documents sheresgary to gather evidence regarding valuation assertion of receivables: e Mouching shinies several doys before the balance sheet date to the source documents you ner evidence regaraing existance essertion of recewvales wile woul enue sees ner the balance sheet date tothe source documents fs nEcessery 10 GAtNer seijance regarding the completeness assertion of receivables, Assert earies several days before the balance sheet date tothe source Socrates ouching entre er evidence regaraing gh assertion of recevables while vauieg Saris? necessary te Bee the balance sheet date tothe source documents Is necessary to gather eidence regerding the valuation assertion of receivables. ccounts receivable i the folowing is 2 valid 11, Your audit of the account recelvabe through analytical procedures revealed thar re Tour ast Aig nad ftien from 7.5 times co 4.4 times from the previous year, Which o faudk insight from the said information? ah Ho a nave been w more liberal credit Poticychus the auclfor shoud eer sample site jecounte receivable Frere rusts receivable confirmation to gather further audit evidence on a fuistence and rights assertion 1 Beare nh es more stringent crea Ptiey thus te aud shou gather futher caer rigence in support of tne valuation assertion on accounts racehyae, othe gudtor should Increase sample ‘c_ There might have been a more stringent credit Policy t thus There mgr fs recavable confirmation to gather further aud evigence on accounts recelvable nisterice and rights assertion Fear ar ven a more era creat Policy thus de auctor should gather ure avate There redn support ofthe valuation assertion on accounts recelvale 12th gathering evidence regarding the valuation assertion of an su Clans’s SeeO recervable, the euditor In gaming evince rearagementregarany the paicy of proving bad Geb SPSS 26, sou eaing sllowence and more important, gather evidence regarang we, easonableness of such povcy coreaponcing atowan say bee possible source of evidence regarding ane reasonabieness of #7 ‘eudie clent’s policy of providing bad debts? proving bad FDS, sppering afer the balance sheet date but before the ssvance of te finaneie) statements. bo Historical experience of the. ©. Bad debt experience of sie Alot the above. ‘ausit client regarding writing off uncollectibie accounts. iaeompany whitin the same naustry ‘ratement assertion of completeness of [Dalance. The auditor would most likely 20 BLE 2 fants to obtain evidence in Support to the f picpase transactions and the coresponding accounts payable Piveh of the following substantive test procedure? re Sface back journal entries to the.purct Gocuments and receiving report documents proved purchases orders tothe receiving reports ‘of uppliers whose account balances nases journal to the supplier's sales invoice and shipping . > TeX accounts payable confirmation jeter to a sample sere ac satstanaing as of the Dalance sheet date den esr ee parts to te supple sales nvvces, then free enews i te purchases journal 42, -The audtor race a sample ofthe purchase orders and te related recving reports Fo ene purchases Tre nate purpose of tis substantive test procedures Most WAN fe ‘The purpose of ts purchases were propery recorded which consistent with gathering evidenes Determine the completeness assertion over purchases and accounts Paya oer te cetrecorded purchases are for goods actualy recewed and ordered wn Te ne ijatvering evidence sn suppor ofthe occurrence assertion over purchases and Gostence assertion over accounts payable spotty recorded whichis consistent with gatherng evidence ‘cBetermine that purchases were pr Determine tna occurrence asserson over purchases and existence assertion over 3ccQunS payable tee aner te recorded purchases are for goods actualy received and ordered wich 's Test whetnes jamecing evidence suppor of the completeness assertion over purchases and ‘secounts payable sment cycle, the auditor decided to render a purchases 3. As part of auditing the company’s purchasing/cisburse a tO res uveral Gays before an afer the balance aheet gate, December W100 tm ural by 7209 ee una tothe source documents, which include the purchase order, the sales voice of Sompan’s Pur ne recevng report. Wrach of the folowing ' corret regarding the purchases cut-of proceaures? roST emperenties are traced back tothe source documents to gather evidence regarding the Dace e esn over payables; January entries. ae traced back tothe source documents to : Ghtner evcence regarding the completeness assertion ever payables. ae eee tre tracea back to the source documents to gather evidence regarding the aac oer cosacsarion over payables; January entries are traced back to the source documents Cenetner evidence regarding ene existence aSSerI0N OVEEPAYADIES. ng RUDITING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENTLLA) 70 2RSA: The Review School of Accountancy Page 5 of 28 documents to gather evidence regarding the & December entries. are traced back to the source 1d vock to the source documants to Chavon assertion over payables; enuary enies are trac dae ence regarding he exience eseron over payabes nee aaa cs are traces back tothe source documents to gather evience farting te vatuaticn assertion over payables. 4 ech of he fining procedures would 2c sudtor mest key do to perform sarc or wracrded abies que virich of tre oe cement assertion te mosty vandated by the procedue? ch ancl serene gris te purchases jour ut before yearend co the wore Voucng 8 ame rye consent m genera eence about de exserce amerton of the rece lables. oR gerae Haietsease orders ved jut afar your-and wn the Year Sear ng 9 samale of purcnase orders tseegangewierce about te completeness of the fetoroed tobe: e Stoming We cash & Sensactone wnicn fe “osent teiis. 4 MOM: sample fc dburstinans reir ot afer yer ar Tang T00"G S vouahng 9 sale ae eens in getnanng eigenen aut the completeness of fecorded abies. sturaamets tires recordeo just ater year-end for inceaions of urna, igatvering evidence about tne existence of the recorded syables of an erty? at the end of the fer the end of the s._weven ofthe following procedures primary 2 84 or Eonipleteness OF rade Pt earee Cron/eontimation © trade payables supplies BL Sample. checking of balances outscanc! the accounting records Same creed forwar to. payments co Suppliers mace mmediately, ‘bccounting period. aug ig of pases to suppers made mmmesiacly Wee Oe $7 of the accounting Semple cracking St anaing pe the eccoureng records atte ert he Sear Oy period. 4, ccta lanee “erauonamp beowean reported purchase for the ecossteg ‘permed and the A ery rnae payabies baloncas ovstanaing at uve and ofthe a6scursnd jariod. = aatatecl poate contemation to prove evidence abou te completeness esgarton for 26c2uniS payable; the Mppreprate population most likely would Be: at oo eamts recorded in the accounts payable subsidiary ledger B Payers of checks drawn in te month ater, ha year-end be Pavees nth nom the entity has preyicusly one business WAN §. Tnvotees filed inthe entity's open Kiva fle, chart’s controies has provided you wi "yal (magn of Une fotowing audi procedures would ne payable has been omitted from the schedule? listed on the schedule. edule but net listed on the 6, When using irene | ema eoading bal 7. im auditing tne accounts payatie velance. he th a schedule listing the In audigy te amount owed to 430" at Cecemoa! 2 reer pene choice fr eetermining tak no inataual aco 1 Oe he Femetin requests to @ ranomly selected S2MG}8 oF ea 2 Send SSoremation requests vo creators that are bsted on the fa Comesponding December 31, 2037, schedule. ce ie mupport for slecea January 20:9 payments to credors,ascealning that those relating to 2019 are not on the schedula. rote ae ee for seachd Danary 2019 peyments to creors,azcereainng that those relating fe 2018 are on this schedule, ‘a, wnich of he flowing aud roceduves would mast Ikely Be apProprtS Metron on the estimaced labilty for versentins? 7 on the SSE oe company poly in-catermmning warrey prowsons end Gevec, 8 separate Inguinal the worrancns expense and estimate waranty laliy based an Se palicy of the company. », ugh ecnel warranty costs incurred to supporting documents Sue" ts epee, ‘and work orders. vouch aia weccved frm custome’ to ove orginal 34s mvcce to determine wnether ‘such WeoSe being renurmed are covered by the warranty Program. " gene beng erescompeny's pote in deeming, waranty prowsions and, Seite the Inqure abe Oe Spe esemaion pobcy by comparing with industry experience, ison! cxperience and/or subsequent evENt. ny the sccuracy of payroll calculations and payroll account ‘gathér evidence about valuation ‘9. Which ofthe following staternents best explains ‘Gstribution is ertical to auditor? os rea ace several staterret of nana postion and statement of comprehensive Incbene ‘ecounts. eee wu complain to management f their paychecks. Nok reac, wages OF, Sales eared. ce PetSH is pond in cash, an account thet s highly susceptible to fraud, | § pabfang standerds require chat tests of cash and payroll be coordinated | | cae arg describes the autor’ role when atencg a cient's ventory COUN? "To count all ventory. bP To identity damaged and obsoleteiinventory. DTG supervise the Invantory counting teams. To observe the conduct of the inventory count. ea ‘[RODITING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENTLLA) 7023 RgSA: The Review Schoo! of Accountancy 3) fete sulle pordpective, what is tle id ‘a. At the balance sheet cate Before the Balance sheet date ©. After the balance sheet date. Si Several umes duting the period under audrt 4. Which of the ellowing procedures carried out atan inventory count by an auditor overstatement of inventory? crerree were that have been test-counted to inventory sheets. B eactre completeness of sequence of pre-numbered inventory sheets count «Check that inventory held a third party locations is gree items appearing in the inventory summary prep Count tothe test counts done the by the autor. 44. which of the following procedures carried out at an inventory count by an audor overstatement of Inventory? ar agree ems tat have been test-counted to ventory sheets. Page 6 of 28 1 ming of the invantory count procedures? ssa test primary fr “svleee atthe conclusion of the Included in the count. ‘saved by the client after the inventory ssn est pearly fo ese aah Star roncmaving cbse ventory REM. = 14 inventory sheets at the conclusion ofthe PEheure completeness of sequence of pre-numbér ‘count. ‘ds. Check that inventory held thied party locations is included 5. An auditor selected stems for test counts while observing the 2 ‘raced the test counts to the chent’s inventor Concerning manegement’s assertion of: ‘2 Rights and obligation 5. enstence e Valuation 6. Completeness 66, An auditor nas accounted for a sequence of ‘She's new going to trace these tothe final Procedure is most Iiely consistent with os ely Crmrectve of ensuring that Kems physically present and Shrseal count are included in the nal ventory 5 Drvence and sights assertions over the inventories 1b, The euotor’s objective of ensuring Dhysical count are not obsolete Prov! Sraouiaton of the cent of the Invento observed during the Jnysial count of iaventor We eeang, The procedure most Ikely obtained evi 1 inventory tags noted during the observation of In the count. ries The auditor tnen wy count sheets, Ths audit “edule providing evidence about the client's {ae te items physically present and observed during the Ming evicence about the chent’s valuation asst tems physically present and observed during the cc The auditors objective of ensuring that i pfatat court are owned by the cent provicing & [ssertons over the inventories, a, The auditors objective of ensuring physical count are include eo raetenese assertion over the inventories 7. To.gamn assurance that snventories appearing inthe To gan essen or most ikely would —__—____ 0 gata vidence 200 — aes Comory tags noted during the Aualtr's observation fo tems dnd vendors invoices; Exsstence Trace items listed in receiving reports Completeness cere insentory tags noted dering the auditor's observation to items lining schedule, Completeness, 4, Trace back kems listed in the ventory Tecorded count sheets; Existence, 8. An aucitor most likely would analyze Inventory turn-over rates to obtain evigence ‘assernon about 2 Valuation b._ Existence and occurrence Rights and obligation 4. Completeness. 19. Which af the following auditing proc letity’s inventory valuation?” idence about the cient’s existence and rights thae ems physically present and observed during the Pee Re nal inventory schedule providing evidence about the client's cene’s inventory listing schedule represent valid i assertion, Usted 9 receiving reports and vendors’ invoices to the Inventory listing schecules sted in the inventory listing schedule te Inventory tags and the auaitor's concerning management's Jedures most bkely would provide assurance about a manufactunng 2. Obtaining confirmation of inventories pledged under joan agreements, Vest 2 Rewewing shipping and receiving cutoff procedures for inventories Tracing test cOUNES tothe entity’s inventory listing Testing the entity's computation of standard overhead rates. tne physical count jertion over the 40. PAS 2, Inventories require that inventories be valued at lower of cost oF ‘net realizable value a at ° lar fas 2, meurig agar ta rere ald icf carsrang evenceoceemine {the reosorableness of the client's estimate of the Inventories’ net realizable value AUDITING PROBLEMS — PREWEEK MATERIALS (IRENEO/ESPENILLA) 702 6ReSA; The Review School of Accountancy Page 7 of 28 48 Vouching cient estates to the last Sales inyoKces (01 finshed goods inventory sales and Suppers purchane voice for row materials purchases b. aeetmtaring by comparing chent estimates against industry's current prices of similar iwentories. Meeing test counts noted during the physical count of inventories tothe client's inventory summa. 1d.” Subsequent events F2v/0¥, Lents inventory forthe period ended December 31, 2038. Aner sea aere ata resi of te chent’s ternal control over lnventones, you have ascertained thatthe meres eee aeaei fective tus rreinvained che incernal control risk at below the maximum level. tn connection t2 Sear aaceidea turer, as substance test procedure, to simaly test the reasonableness of the rapa rn yee Ralonce By rendenng mventory estinzbon using the gross profit method of creating an expectation yen etre chats mvenory balance sould be. Which ofthe Following 8 corect, if the auditors seree ct betance usmg the gross prof snetinod s materially diferent from the reported lance per Books 2S 2 result of the physical count? 2. The auditor should oropose to the audit clent to adjust the Book ‘nalytical procedure iaventiry estimation. Danger shoud sseue a quaified opinion due tothe material misstatement in the inventory The maieate nthe audit renore the extent of the material misstatement ere a ut tart ve buat orocedure Dy rendering adaional cat of etal of sansa alance and eransactions to ascertain the source of the material mssearemers ea lace Ad propane te tve aw cert that an aul adjustment necessary 253 resue T your eukeprocedure endothe cient isnot waling to make the necessary adsl ent cya ave the portibie implication af the material misstatement ro the ype f ava pnion {you wil be issuing onthe france! statements 11. You wore assigned to audit a merctiandshiy to equal the result of the PROBLEM 8: AU conclude that cerveciation charges may Be insufficient 1 tinuous trade-ins of relat ely ew ASCE. 3, Tesurea vaives greatly n excess ct book wales P Recurring gains on retirement of ssiets. |” & Excessive recurring losses on retrev assets ithe or ene notes: caused 2. tne Sister suspects mat ine deprecation charges may have bee overated (0 the pres a6 ml 8% The mudora Pee cp of te flowing coservestons maces consistent wit Ns So. ent year wc of xe (weg anv nape of propery, plant and equipment ecards chat Te 24d Me ely neared sinlirantYosses on Feiement of property, planar be Te ger nas ezcovered contyucus wad The auctor pas Sern thet the carsyng values of the their insured valves. serad thy ough the property, plant and equipment records that tnere are 4. The auditor has dscow rr ay dexreciated aasels thet are sil it operations, f-ing of relauvely new assets properties are signficantly 0 excess of + wre afte folowan teclaves fr collocing ava evidences general necepted #2 Phe MSs efficient rch ofthe foloens ser hudtor shen testing forthe completeness and accuracy of ee depreclon Ghrarge forthe year? ie Analytical procedures, 1. Reperformance. © Confirmation. . Physical iespection pment accourt, the sustor requested from the 44. -Rs part of avating an audit cients’ proverty plant and en As pare of au perry ecors ond « sede of epars and mamtenance expente curng the Pere ent ec ilech ote folowing 's correct reyarng we Go schedules vat. ich cf re gropery edarne aug the ear ' essential in gating evdenence regard Tre seme eh aserion over PPE wie the schedule of repairs tnd maincenance expense the comeitetgavory m gather ng evidence regarding the cxistence assertion over PFE: oer De of property adaiionscureg the year is essential in gathering evidenence reg27dig secre aeserion ove PPE whe the schedule af repars and maincenance expense account rae ny in gathering evidence regarding the existence assertion over PPE- ce RORSESEGO or aroperty adgtions during the year & assent n gathering evienence regarnng a ance eecron over PPE wile the schedule of repavs and maintenance expense account The exe un gether evidence regaraing the completeness assertion over FPE. ERE. Gforopeny scdtions during the year andthe schedule of repars and maintensece are acre tanta necesery mn penning eveence regarding the valuation asseruo" over PPE.” 5 in testing for unrecorded recirement of equigment, an auditor, most [ely would which is a test of SN assertion on PPE, Compare deprecation josreal equipment, exsten: Inspect items of equipment observed durag the plant tour equipment subsidiary ledger, completeness eye ieams of equipment from the accounting records and then locate them during the plant ‘our; existence entries wit similar prior year entries in search of fully depreciated and thea trace them to the “AODTTING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENILLA)ReSA: The Review School of Accountancy Page 6 of 28 4. Sean the genera! journal for unusual equipment additions and excessive debits to repairs and maintenance expense; completeness 6 Which of the following explanations most Hely would satisfy an auditor who questions management about ssgnificant debits to the accumulated depreciation accounts? ‘3. Plant assets were retired during the yee. b._The estimated remaining useful ives of plant assets weré revised upward The prior-year depreciation expense was erroneously understated 4, Overhead allocations were revised at year-end lle assets adaitions during the year to the > Vouching intangible assets isted in the client's schedule of intangi for's objective of validating the Gocumentation of the purchase of intangible assets 1s consistent with the audit management's assertion of: ‘8. Valuation and rights 1b. Completeness and existence Existence and valuation Existence and rights or recomputed amortization and determine 8. In auditing Intangible assets, an aucitor most ikely would review. e's financial starement assertion of: whether amortization period Is reasonable in support of managemer a Existence: Completeness. Valuation 4G, Rights and obligation 9. Examining documentation of the purchase of intangible assets 1s consistent wth the auators objective of ‘Validating the management's assertion of '2 Rights and Exstence 1b. Extence and valuation © Completeness and Existence Rights and valuation 10, The auditor is unabie to inspect and count client's investment securities until aRer the balance sheet date the ban where the secunties are Neld in 2 safe-depost box should be asked to ere ae secferences vetween te contents of the Box and the balances inthe cents subsidiary eager b. eaaete a ist of securities added and removed from the box between the balance sheet date anc the secures count date Count the secures inthe Confirm tat there has been no access Secures count date box so tat the auctor wll have independent verification fo the box between the balance sheet date and the 11, How snould the auditor establish existence and ownership Of the non-tradng equity secannies subjected to the aut? coresponding wth the investee comBany to verty the numberof shares ownes. a ore pote umber of shares ones that are held Dy an independent custodian. ee cemtcuing the audtes financal statements of the investee company, S BeRRnaag that the sivestment is carried curcent Fair market value ‘whic of tre flowing would provide thé best form of evidence pertaining to the annual valuation of @ !ons tech ot Srment an wih the independent auctor’ chant owns 2 30 percent voting terest? 2 nudtes financial statements of the investee compariy 2. trarket quotations of the livestee company’s shares C Coment for value ofthe investee company's assets S. fastorical cost of the investee company's assets 2 13. when of the following would provide the best form of evidence pertaining to the annual valuation of a Wc preference shares in which the independent auditors lent owns a SO percent interest? Sr "Convent for value ofthe investee company’s assets B.mistorcal cost ofthe Investee company's asset= C_ udted financial statements ofthe mvestee company G.. Market quotations ofthe investee company’s shares 14, in testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the Te Completeness of the recorded investment income. b Clapstication between current and noncurrent portfolios Valuation of marketable equity securities G. Existence of unrealized gains or losses in the portfolio, Pe ests concerning the granting of stock options, an aucitor shoul: “Trace the authorization forthe transaction to a vote of the board of directors. b. Confirm the transaction with the Secretary. 2. enty enatence of epton nolders in tne en's payrol records or stock ledges. & Detefmin tat sutton reonury sts avaiable te cover any new eck need ‘AUDTTING PROBLEMS - PREWEEK MATERIALS (IRENEO /ESPENTLLA) 702 3]RSA; The Review School of Accountancy _ \ (Page 9 028 ‘The audit program for the examination of rhe retained earnings account should inchude a step that requires veriieaton ofthe 2) Maker value used te enor etaned Jorge eta eariys to account fora twotr-or st B Rppeovat onthe aojsimen tothe Begg balance a9 rau of wte-down of an accounts recevanie, > Authorization for the stock dividends, 4. Gain of loss resultvy fosm cispcstion af treasury shares. 3, The avettor should ordinarily obtain evicence about the stock'olders’eqity transactions by reviewing the entity's Minutes of board of alrectors meetings. BL Tratster agent's records, €) Canctled stock certificates. 1, Treasury shares certificate books. 4. the auditor discovered that Pomar Co:rordhion dees fctshaintain its own stock retotds, the auditor should abtain writen confirmation form he transfer agent ana registrar concerning Mo Restrictions on pawment of tha Phvidends 1b, Guarantees of ordinary shares liquidation valu The number of shares suaject to agreements to repurchase, 4, 5. Inaudtting the bonds pay syable belance, the auditor mast likely Would T Compare interest expense with the bonds payable amount for reasonableness, 2. ferform analytical procedures on the Dond premiunt amortization. P Bkamine documentation of assets purchased wath the bond proceeds for lens. Confirm the existence of idiv dual Bond Molders at year-end. nen a CPA observes thatthe recorded interes? expense seems to be excessive in elatian tothe balance in the bonds payable account, the CPA might suspect thet a. Discount en bonds paysble 's understatec B. Bonds payable are Understated €. Bonds payable are cversicted 4G. Premium on bonds payable = overstatec PRO Rr dening cash counts for cash on hand, the LU 1 Fine imprest balance of petty coh fund: where TRS depostable callectons (rein customers 85 of Undepested collections ce nstesrar money neld by che custodian other than the petty cash fund wn ebostable collections 0% customers f Meld Lac : ng eee ore eld oy the custodian other chan the pty Cain fund imorest valance and po apie collections for customers, not held 19 tact lane accountability may no longer Include: ‘he accountability 5 paty cash fond he count gater where the accountability 1 balance and ‘acceptable support to the accountability hich ofthe follewing shall se Ramps where the accountabilty is petty cash Fund aes Nine accourtabiity I undaposted collections. ORF cnecks where the acrouniabiity 's uncerosted collections S. pasedateg ond NSF chacks accommodated Dy the petty cash fund 2. In rendering cash counts, 2. Unused postar Bl Post-sated checks shortage shall ke observe when: ‘he eustodker v2 higher than cash ems. Ene cuatogian is higher than non-cash ems. sroGian is her than cash tems and.ner-cash cerns sotian i lower than cash tems and nen-eash iter. 3, to rendering cash counts, & 2. The accountability of BL The accounted ity of The accountepiity of the ce The accountability af the cus ro gather evidence regarding the deaosts nari certorezared bank reconiaton sateen, an audtor would examine ‘Year-end bank statement Bank confirmation reply General ledger . Cat-off bank statement Scene arumente ofthe chent, the auditor should trace back the unrecorded 5, In validating the bank reconciliation & debts, ike service charges to th ia Bank statement of che current month, .) Accounts payable voucher S CEhcelied checks returned by the bank. § Got-off bank starement of the subsequent month. « the auditor should trace bagk aytstanding checks to «6 invalidating Bank reconciliation statements ofthe cliert, he: ‘a. Aécounes payebie voucher’ =seund emcee oH B. Cancelled checks rezames by the bank, “aoftin pRDLEwE PRWEEK WAFERIALS” (IRENED/ESPENTLLA) “« § 702 GsR,SA: The Review School of Accountancy © Page 10 of 28 ‘6 Cut-off bank statement of the subsequent month, 4. Bank statement of the currant month. 7. te his mudi of the etient cash in bank account as of and forthe period ended June 30, 2016, the autor ‘requested for a cut-off bank statement (or the 15-day period ended July 15, 2018, The purpose of the cu-of! ben sree 5 to gter evans egerang ie Pept en Sethe fellowing reconcation ems Deposits In transits and unrecorded bank credits Unrecorded bank debits and outstanding checks. Unrecorded bank credies and unrecorded bank debits Deposits in transits and outstanding checks, 4._-cash shortage may be concealeé by transferring funds frm one cation to anther or by convert ig, hegotlable assets to cash, Because ofthis, which of the fllowing Is wal? =} ‘2. Simultaneous verticaton, b._ Simutaneous confirmations. ©) Simultaneous bank reconciiatvons. 4 Simuleneous surprise cash count 19, The proof of cash statements is usually prepared by the auditor when: 7 ncernal control over cash i= strong and control risk is placed atthe maximum 5) Gash balance is very significant. Cash balance is very insignificant G._taternal contol over cash Is weak and contr risk s place at the maximum. 10. Whieh ofthe following is a test of controls over cash? ne vcimoacia accountant reviews the monthly bank reconcihation statement 3. Petty cash is kept in 2 locked tin inthe safe 2 Cash and checks are safeguarded against loss or thet. 4. Post-opening procedures are observed: PROBLEM Z: AUDIT OF SASH a of markat Corporation's pty cash fund wih an imprest balance of 40,000. ‘The custocisn presented to you the following: ‘Corcencies ana-coins 12,540 [h dsbursernent check payable to the custodian 15,600 ‘an oficer's personal check accommasated by the fund 4,000 Manager's check marked NSF 2,000 erty cash expense vouchers 12/20 Transportation 1,500 42/24 Office repairs ‘900 42/27 Miscellaneous 2,100 ‘unused postage stamps ‘500 seeitteloped marked “collections for chenty" with list of "names and corresponding amounts contributed, There 6 fhe money inside the envelope 2,500 What is the petty cash shortage as of December 31, 20187 23,869 3,360 b. 1/360 4, 5.860 \pany’s cash position at PROBLEM A: AUDIT ermal contro over ts cash transaction is very weak, TRE com December 31, 2018 were 2s follows: se cash book showed a balance of P15,000, which included cash on nand. A credit of P350 09 Sana Tne cash book shower en the company's ooks, The bank statement showed a balance of 12008: ane oe records did nok SPP Stores 0100 ~ P120; 0201 - PLOD; 0300 = P220; 150 ~P410; 1810 ~ PI4O; and 1515.~ 150. ve cashier removed al of the cash on hand n excess of 3,000 and hen prepared te fojowing rerenciauon ‘Balance per books, Dec. 31, 2038 15,000 fad: Outstanding checks: No. 1501 p10 1510 140 3515 isa __ a0 15,300 Deduct: Cash on hand — 3.990 Balance per bank, Dec. 31, 2018 72,300 Deduct: Unrecorded credit 50 azia59 rue eash, Dec. 31, 2018, ‘what is the cash shortage? ‘AUDITING PROBLEMS ~ PREWEEX MATERIALS (IRENEO/ESPENILLA) 70 2RgSA: The Review School of Accountancy 400 >. 300 stacenent of PROBLEM 9: AUDIT OF CAStt ‘You were assigned £6 ausit the financ December 31, 209. The general ledge ‘The bank reconciliation prepared by the ci Cash per recoras, DecemPer 31, 2018 Cash per bank statement, Dece:nber 31, 201 Note receivable collection by the Bank in Dar ‘nanuary 5 Ban service charge for the bank {Check of Jude Corp , charged ay the hank in error on December 38, 2038; Corrected by the bank on January 2, 2013 Deposit in transit, snclading P5,200 customer callection check marked NSF From January 2,'2089, to January 15, 2019) the date Cash recoras athounted to 186.500. Dung the same peg, deposts clearing the ‘The following cash ane cash fers were on han atthe Currency Customers’ checks Expanae vouehers Audit notes: “Date 7/0518 ftlowarce for bad debts “accounts receivable 22/10/18 Inventory ‘Ancounis recevAble 12/1518) “Bad mebe exoense . "agrounts recewabia 1b. Check depeut on January £, 2019, amounting £9 &_Undeposited collections on Requirements: eimwar)racordea 9 books January 3 Ourstanding credks, cluding 11.900 dsbursement check certified by ‘ \ page 14 28 «, $00 700 Jade Corp. on January 15, 2049, or the yea! ended ‘shows cash account Dalance of P726,600 as at December 31, 2018, "cashier inciuded the folowing items: °726,600, 16 792,285 cember, recorded in the books 20,000 5,000 7,875 2,280 15,700 receipts appearing in the Denk amounted to P143,895. ve close of business on lanuary 15, 2029" 4.275 5,850 : 12s of your cash count, total cash ‘Coch rotlections (tom accounts vece:vable were erroneously recorded ay the company as follows: 12,000 12,000 9,000 9,000 10,500 10,500 6,000 was oot recorded in the Books. january 10, 2019 amounting to P13,500 was also not recorded in the DOoKS. at is the corrett cash in bark balance as of December 3, 2018? a ra 2” 729,060 778,310 bowaraaie Ce So 726,810 5 2. what isthe net adjustment to cash as of December 11, 2018 3 45,500) 44,040 5B 2.460 B42 c 3. what is the cash shortage 25 of Decemiver 71, 20187 2 2460 44,040 b. _46,500) tl 4,620 A 44, Whats the (otal rash shortage 25 ut Janudiy 15, 20187 3 81.645 444,040 b.371605) 4 feune of Carrere Ln. fr ou are evateng the cash he fiscal year ended July 31, 2018, The client has not reeset tne Jay 38, bank reconcilaton, The following information ware made avaiable Beginning belances Depusits Casn receipts yournay Checks clearing the Dat Cash dabursements rurta) duly bank service charge ote paid bythe bank NSF check Ending balances Audit notes: Deposits in trans, P18,009, Outstanding check 140,330, " ». ‘AUDITING PROBLEMS - PREWEE) General Ledger Bank Starement 140,330 172,530 751,680 163,680 (708,450) (654,330) * " (2,610) ait i (183,000) _ (8.330) P89 680 P20, 880 ‘Sookcconciietign in une included the Fouwning infrmation: Bank statement balance, June, #172.590; 5, 52,64, and) Balance per general ledger, June, ‘checks clearing the bank in July, Sulscanding by the end of June was at P5O,760,RgSA: The Review School of Accountancy Page 12 0f 28 Checks clearing the bank in July and were recorded inthe July cash diebursement journal wa at P614,010, ‘4. A check for P31,800 cleared the bank, but had not been recorded in the cash disbursement journal It was for-8 payment of an accounts payable. 16. check for P11,880 was erroneously charged by the bank to Carrera Inc {Deposits included 18,000 from June and P733,680 from July. 4. The bank charged Carrera Inc.'s account for a non-sufficent-fund check totaling to P9, 230. The credit anager concluded that the customer intentionally closed its account and the owner let the ety. The check was turned over to a collection agency. hh. Anote for P174,000, plus interest, was paid directly by the bank under an agreement signed four months 290. Required: Based on your audit procedures and appreciation of the above data, enswer the following: {How much isthe total outstanding checks as of July 317 ai 2, 32,490, €. 29,940 5. 41,820 &. 10,020 2. How much isthe deposit in transit as of July 317 2. 20,940, © 18,000 . 30,000, 4, 27,330 3. What is the corract cash in bank balance as of July 31? 2. 32,820, ¢, 20,940 b. 11,180 4. 9,060 «4. How much is the cash in bank shortage as of une 317 2. 2,200 © 2,000 b. 11200 6. None ‘PROBLEM 11; AUDIT OF CASH: CASH/AGCRUAL Pa eae tt Atur avdk of Burberry Corporation for the period ended December 31, 2018, your auale staf provided you the following audit notes: Aude notes: Mounts receivables from customers increased during the year by P4,200,000. Total discounts taken by Ae recat at 81,560,000 wile total sales returns which included the customer refunds was at 2,420,000. 1b. The allowance forbad debts increase during the year by P840,000. During the year, the company wrote- DAPt70.000 m bad debts. while recovery of previous wr'te-ff (included inthe cesh collections from customers) was at 420,000. Aavances from customers decreased during the year by P1, $00,000, Je to suppliers increased during the year by P3,780,000. Total discounts taken by the 1d. Accounts payab 1 290,000 while totel purchase returns which included the supplier company for purchases was at refunds was at Pi, 960,000. ‘Advances to suppliers increased during the year by P1,512,000. {Inventories increased during the year by P2,690,000. ‘tne equipment account increased by 2,000,000 during the year while carrying value of the equipment ‘01g during the year was at P1,600,000. hn. The accumulated depreciation account increased by P1,000,000 during the year. |. the following information had been provided by the company’s accountant based on its cash records: Cash collections from customers 45,780,000 S ——341490,000 Cash payments 0 suppliers ‘Cash payment of operating expenses 8,650,000, Cash payment for acquistion of an Equipment 5,000,000 | Cash collection from disposal of an Equipment 1,040,000 ‘640,000, 830,000, Cash refunds received from purchase returns {Cash refungs paid for sales returns = Requirements: 1, What's the accrual basis gross sales? 2. $5,750,000 © $6,170,000 ». 35,000,000 1. 56,580,000 2, What Is the accrual basis gross purchases? a. 31,520,000 30,880,000 30,008,000 . 29,368,000 [AUDITING PROBLEMS - PREWEEK MATERIALS (IRENEO/ESPENTLLA)ReSA: The Review School or Accountancy 3, What isthe accrual basis cost of al ‘8 24,088,000 < b. 24,940,000 4 What is the correct bad debt expense for tne year? a. 41,540,000 ¢ '. 700,000 4 'S._ whats thuicortedt depreciation expenre? 2. 2,490,000 ¢ 2,000,008 “ { CASHNCCRUAL Fore Corp uses the clrect mertiod 9 pranare S state December 31, 2038 and 2017. are asf bees casn recounts recewable Inventory Broperey, plart & equipment UUnamarised bond aisoant Cost of gooae seid Seling expenses General an aainvcratve Interest expense Ineome tay expense sy Sees ©. fowance for oneatectble [Accumulated cepreciation ‘Frade aceeurts payable Income taxes payable Geterred x abity ‘85 callable Donds payable Shere caper Share peemnian 1 Retained earnings « sales «Ford purchased P5,009 in equipment during 2018 «+ Ford allocated one-third of ts deprecation cane agministrative expenses QUESTIONS: Bose on the foregoing. what fended December 31, 2018 for fash collected from customers? 536,000 48,600 b, 541,600 541,600 2. Cash pais for goods fo be sols? 2. 226,500 242,500 b._ 257,500. 6 288,529 3, Cash paid for interest? 4800 Sey b. 4300 A 4,700 4. Cash pad for ncome taxes? 2 20,400 19,700 b. 25,800 a. 15,909 5, Cash pad for seling expenses? 140,000 142,000 141,500 4, 141,000 PROBLEM 13; AUDIT OF CASH/ CASH:ACCRUAL Premnanis of incomplete records of Journey Curpuraton "ACCOUNT IRCKEAS Cash ‘Accounts race vate ‘Accoutts payable [ACCOUNT DECREASES. Inventory [RUDTTING PROBLEMS - PREWEEK MATERIALS (IRENEO/ESPENTLLA) » © Page 13 of 28 23,420,000 35,580,000 #,960,000, 140,000 3,600,000, 1,400,000 lent of cash flows, Ford Corp. tal oalances at wus 12M? » 35,000» 32,000 33,000 30,000, 31,000 47,000 409,000 95,000, “4,500 5,000 250,000 380,000 141500 172,000 137,00 151,300 4300 21600, 20400 _-61,200 756,700. . 976,100 © i300 P1100 361509 15,000, 25,000 17,500 21,000 27,100 5,300 4,600 45,000 20,000 50/000 40,000, 9,100 7,500 a'700 64/600 $38,800 278.700 756,700 976,100 casi 16 selling expenses and the remainder to general and “amiunts Ssould Ford C6r0. repart ints statement of cash flows for the year duced the following information applicable to 2018: 4,200,000 1/400,000 “400,000 1,000,600 702‘The Review School of Accountancy Page 14 of 28 Notes receivable 600,000 ‘Summary of cash transactions were as follows: RECEIPTS: Cash sales. 3,000,000 Collections on accounts receivable 30,000,000, Collections on notes receivable 400,000 4 Interest on-notes receivable "200,000 Purchase returns and allowances 500,000 DISBURSEMENTS: Cash purchases 1,000,000 Payments on accounts payable 16,500,000, Sales returns and allowances "490,000 ‘daitonal information: 1 Total purchase returns and allowances amounted to P800,000 Tete sales returns and allowances amounted to P1, 200,000. what isthe acerual basis Net Sales? '2. 37,000,000 36,600,000 ’b. 36,200,000 4. 38,800,000 PROBLEM 14: AUDIT OF CASH, SA rte co, for te year ended Oecember 312007. ©. Yeu are auditing ean ere ony weeps records ts can recep and cash dsursements. AS Pa of ‘Tour aucit, you were requested to convert the records tothe accrual basi ‘You were able te gather the following information: ec 31, Dee 34, 2016 2017 outstanding sales invoices 36,000 835,000 avance colecoons from customers ° 325,000 Gnpaid merchandise invoices 44,000 423,000 ‘98,000 0 ‘Ravance payments to suppers ursement records reveoted the following information: * ‘rom customers, 93,880,000, wins of merchandise, 5,615,000 “The cash recept and isd 2 amount collected {Total payments to supe! What is the total sales for 2017 under accrual B83i5? "2. 10,013,000 «30,064,000 b. 9,716,000 10,189,000 ro AUDIT OF TRADE RECEIYART ey nc as of December 31,2038, The genera ours Yeu ar ai. vecle balance of P,520,000 wich was net ofthe nadutes alomance or bad debts, Cxpense amounting £0 P46, 720. se accounts receivable subsidiary ledger had th following details ‘Customer Invoice date Amount Balance Grace Inc 9/32/2018 'P139,200 239,200 ratn Corp! 12/12/2038 153,600 32/02/2018, 99,200 252,800 Gusto co 41/17/2038, 185,120 30/08/2016 176,000 361,120 National Co. 12/06/2038 160,000 40/25/2038 144,800 9/20/2018, ‘40,000 344,800 Nano Inc. 9/27/2018 96,000 96,000 Broce Ine 8/20/2018 71,360 71,360 Privacy Corp. 12/06/2038 112/000 11/29/2038 169440 __281,440 oral Fi,546,720 ‘Addtonal information: 2! form piccoveres based on your review of subsequent events that Bruce Inc recently want bankrupt, see eur suggested thot the amount receivable from the same shall be written off based on an accounts receivable confirmation reply from National Co., you discovered that sales ate of aed 1025/2018 was erronecusly invoiced at P144.80 per unit of the merchandtse sols to the company, the correct invoice price should have been P114.80 per unit ‘RUBETING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENILLA) 702 fs Faa®)ReSA: The Review Sahoo! SHAceountahiey”——''"! 4 | Page 15 of 28 You aso discovered thatthe voice dates 10/25/2018 has already been settled by Truth Corp. per Ghiausiver Ss0S, This amount however ius bean erroneously peated spetnst Gusto Co. subailary Iedger asa settemant for ev nvorcs dated 11/05/2018 forthe same amount ‘based on the company’s receivable collection experience: 6 of Coectivity 959% 31 - 60 days 95% 1 ~ $0 days 90% 31 120 days 30%, ‘Over 120 days 50% Recutres . 1 Winat is the correct allowélice fo- os debt expense forthe year ended December 31, 20187 : a 1a7.3a ce t4g48 B. 7 130,320 fa, 127,320. atiowa-e for doubtful accounts, what 1s the correct bad 2,” Assuming that there wore no othar entries t lebt expense forthe year? ‘a. "80,600 154,960 b. ° 51,960 a tags 5, WSC VE rei Wate 5 ne @inaiiysexoures receraiejas of Cecember 51, 20387 31 318,000 ch 1azno16 5. 1345,060 4, 1315040 acu 4. Whats the necessary adjustiig entry to anyuse any nlocated difference between the SL an "20,000 ‘2. Bag debt expen: ‘accounts recewatle ‘a. Sales co necounte receivacle ‘Other income Ne necessary entry cof Jackson Ines recewables as of December 31, 2018. You ected costomvers. The following 1s 8 summary of the noted audit exceptions Gross profiton sales Is at 30% and yet i s Vou were assigned to aydit the existence asserion have decided to send confirmation letters to ore Cnfemation rephes of chent customers where you N eatory records are kept under the perratuy® sisiomars Coniments | Audit fining 1 edit Mein) No. 0878 ‘hve Creat Mero was taken up roprosensing price a0justment | By Jackson In. in January 2019 | [rad December 28, 2018 cancels ‘FLAS, 000 was Tor SAR Tivoice No. | Returned goods were received on | December 31, 2038, Credit | £8 perso oct enurne on December 30, 2018. Correct |) Memo No. 1256 were issuedand, | ce 2 e16d.000 | rece on lane 5 218 a ee eg ies TTT] We eto conpl vod Tease Sap nce anaut A : [toc been grea a P22 ser une | ee rts ued vx Pisa per iil sce ca — 265,600 Sra eg ings | MOEN Tae CORT a] { Sossore00, Te aiterence' for || transaction as -0urchase by i Zales Thoice No 1109 mbicn wer! | creaeng accounts Dayable. The Fopuul yr geogr deter of bat ere Preared vercras were ‘ (ime guentiy returned to you” | appropriately taken in the Deenuse the goods were with | perpetual records. rang spect ii | The goods were delivered on Endige Corp, [This 1s for 3a | We received che corresponding | December 30, 2018 under term | ca OU (go0ds only on Janusry 5. ___| FOB Shipping Point, Requirements: here are any, a8 a result of the customer's Asul Inc. reply? 1a the effet to the net income, a Decrease by 30,000 B. Increase by P30,000 Decrease Dy P9,000 1 8. Noetfect 2. What isthe effec to the'net income, #f there are any, a5 a result of the customer's Bughao Corp.'s reply? (2. Detrease by ?160,002 coocby Decrease by P140,000 Decrease by 42,000¢ a e 7 ° g RgSA: The Review School of Accountancy Page 16 of 28 3. The accounts receivable from Kulay Co.'s ‘2. Overstated by P244,000 1. Understated by P44, 000 Overstated by P44,000 3, Correct 4, What is the effec tothe net income, ‘8, Decrease by P4S,000 i, Increase by P45,009 Decrease by 13,500 8. No effect. '5, The accounts receivable from Endigo Corp. 18: 2. Correct b. Overstated by 122,000 © Understated by P122,000 4. Overstated by P36,600. there are any, a5 a resut ofthe customer's Ollaw Inc. reply? PROBLEM 271 AUDIT OF 1 OWO mended a loan X72 Corp. amounting to PLOM on Janiany Toe receivable 5 AE Co Feces annual interest calecbe atthe end of each vat Sarg eer “31, 2011, years afer, The lon oeer gation cost mourtig to 30,000 and charge XYZ Corp. onpination Ieee Pr020, 965 The yield onthe loan under this arrangement was at 12%: ‘The 2011 to 2013 interests were collected as scheduled. eytne end of 2014, due to Mranca)aitieutes beng expenenced by YZ, X7Z fale BA ‘annual interest fy the end of 2014 ee ececpt s to te cllecbty ote Fematingineress and he PCPA canes dué consiaeravon and corespondence mah XYZ company, ABC estimated tat wi be able to eave the follwing emounts at respective estimated dates expected recovery date ‘amount 1,000,000 December 31, 2015 2,990,000 December 31, 2016 2'500,000 December 31, 2017 3'500,000 December 31, 2018 Requires: Rene: ne carrying valu f he lnansrecewabe as of December 31; 20:4, Deere Imparment? ‘2. 9,519,634 . 9,392,520 °c 9,821.428 9,661,990 2. wow muchisimparment los onthe recevables (oeudig oterest receivable) a5 of Dec. 33, 20147 32,806,499 6,344,509 etiges 926d. 6,855,483 cz net book value ofthe recewables as of December 31, 20147 3, what isthe corres . 6,344,509 25,855,491 3. 5,384,509 2, 6,855,491 se Assuming that in December 31, 2015, amounts were received as esmated, whats he paance ofthe Fecelvabies as of December 31, 20357 fe. 4,225,128 b, 5,958,150 2,232,143 @. 2,500,000 «Assuming that in December 31,2016, amounts were rected as esimate, what se correct interest sncome to be recognized in 2016? ‘8. 267,857 , 702,659 «507,015 4. 666,978 ELOANS RECEIVABIES sTaceount of ABC Financing Cor, 2 fending company. fo we fe oa onered te balance per the general ledger of Laans recenable rom Inthe course of your year ended December 31, 20: er Corp. at P5,000,000. ‘avait nates: inerest at 10% collectible semi-annually every December 31 ‘The loan bears an annul ‘ecm and was made on January 1, 2016 when the prevailing rate of ‘The loan hes @ three-yeer interest was at 12%, cc. Re"SStapany recorded the loan as a debit to the loon charging any diference between the Interest income 4. Semi-annual interest cc ‘appropriately recorded. the loans receivable account at the face value of Toaned amount and the face value of the loan to ollecion on the loan every June 30 and December 31 has been wnt i re total amount extended to DEF on January 1, 2016 and the outstanding balance ofthe loan 25 of December 31, 2017, ‘7 4,826,745 and 4,952,830 4,754,134 and 4,908,330 4,789,382 and 4,266,349 6. §,000,000 and 5,000,000 a TESPERILLA) “RUDTTING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENTLLA)goom RSA: The Review Schoo! of Accountalicy © ‘Page 17 of 28 PROBLEM 191 AUDIT OF LOANS RECEIVARLAS.(EINANG Ean arte ot your socteot he tonne reaveoa eesurh oP FTE Princip orp «land company for th year ended December 31, 2017, you dcovered the balance per Rs genera edger of Its Loans receable om Year ond Deere er Its genera ledger of ls Loans recelvable rom ‘Avot notes : The loan to KLM 1s noninterest Dearing oan which shall mature on December 31, 2019. FReloan was ignnted on Joiay 1 205, total amowee isbursad on Ue date wes Badéd of Che acount rate prev anthat abte st 10% ee ee 4, The transaction was recorded by te cent a8 a deb to lons receivable a face valve ofthe loan harping interest come forks ference tothe amoune ceded to ash. wat the reste, djsmen to tae erigs, Many am of your mt of ons recat 2. 994,741 debit ©. 521,574 debie i. 1,267,946 devie <4. no adjustment necessary PROBLEM 20: AUDIT OF TRADE RECEIVABLES AND INVENTORIES You were assigned to avait the receivables of Charleston Merchandising Company. AS Instructed by your audit manager, you have performed 2 cut-off east of sales. The resus of the Cut-off test revealed the following: Recorded as Sales in December 2017 ‘Seling price Cast Terms Shipment _—Received by Date ‘customers 18,000 -—-PI6,500 FOB shipping point 12/26/2017 1229/2017 20,000 {4/000 Shipped to consignee 12/26/2017 12/23/2037 2,680 7,240 FOB destination 32/28/2017 01/02/2018 3,000 7/500 FOS shipping point 42/30/2017 01/02/2038 10,000 71750. FO3 destmation 42/31/2017 01703/2018 7,800 6/300 FOS shipo:ng oeine 44/31/2017 01/02/2018 14,000 121000 Shippad tocansignee 12/31/2017 01/02/2038, Recorded Sales in January 2017 ‘Sling price Cost, Terms Shipment Received by Date customers, 21,000, 08 shipping point 17/30/2017 01/03/2018 10,500 FOB shipping point 32/31/2017 01/03/2018 4,500 08 destination Oyyoz/2018 01/03/2018 6,500 FOB snipping point «01/02/2018, 01/05/2018 ‘Acount ofall ventories within the premises was made on December 20, 2017, The total cost ofthe count was Aco oreo ae of December 30, 2017. ral of the goods shipped to consignee on December 28 are ceri ae oecember 31, The agreed commission on consignment sales 's 20% of the sales pric “The unadjusted ledger balances show the following "accounts receivat es 376,500 Inventories 525,000 Sales 1,520,000 Cost of sales ‘942,000 " Determine the adjusted balances ofthe following: A 8 c ° 4, Accounts receivable 353,320 329,620, 261,120... 389,320 2 Inventories. 506,800 | 2s,340 $47,440 549,800 3: Soles 1,522,320 1,508,620 4,551,500 4, Cost of sales ‘Speco 328,360 ‘917,500 ‘942,660 PEGA) Deen engaged Dy Portent Corporation to audits financial statements for the period ended December 34, Joie en February 2, 2019, you were unable to observe the physical count of the client inventory conducted on Becernber 31, 2018 In all ofthe entity's warenouses. Based on your preliminary understanding of the client cere toy over inventories and as @ resut of your test of controls You have ascertained that the control risk wera couones ts at below the maximum level thus you simply decided to test the reasonableness ofthe clit Mircntory Balance through snalytical procedure-inve'kory estimation. The following Information were made avaiable as a result of your decision: Cost Retail Price Inventory, January 1,898,735 2,516,130 Purchases 13,901,265 21,600,000, Freight-in 702,000 Purchase discount 1,684,800 Purchase returns and allowances 1,123,200 1,728,000 Departmental transte in 2,808,000 4,320,000 Pan WATERERS GRENESFETPELLA) 702RgSA: The Review School of Accountancy Departmental transfer out ‘Mark-up Markdown ‘Mark-up cancellation Mark-down cancellation sales Sales discount to customers Sales discounts to employees ‘Sales returns and allowances Normal spoiages ‘Abnormal spoilages. 1,684,800 493,012 “The inventory as a result ofthe said count amountes to P2,811,680. Requirements: 1 What isthe estimated inventory as of December 31, 201 procedure? 3. 5,580,548 b. 6,574,788 2, What isthe inventory shortage as 2 result of your anal the conservative cost method? a. 312,612 b. 804,933 3. What isthe inventory shortage 2s 2 resut of ¥ 37, (648,950 170,948 2,592,000 3,510,000 2,108,000 1,053,000 365,058 18,630,000 1,490,400 745,200 2,235,600 4.117,800 894,240 Page 18 of 25 16 at retail price as a result of the analytical intial procedures assuring tha the company Uses «369,417 4 539,832 jour anaiyeical procedures assuming tha the company uses the average cost method? 2 1,058,«87 $96,637 b. 539,832 6 312612 «a Tina dine inventory shortage as’ result of your analytical procedures assuming tha the company vee the FIFO eetall cost method? a 426,222 539,832 b. 483,027 4,382,225 PRO Earation uses the lower of cOSt or net re inventories are as follows: alzdbie value inventory. Date regerding the company's “Tne general ledgers showed the following balances: Cost inched goods 1,520,000 Worin-process 748,000 Raw materials 2,875,000 Allowance: Finished goods (10,000) Raw materials (40,000) -rne following formation were further furnished to you by the cent: finished Goods Tem heme remo cost 550,000 540,000 430,000 ‘Seling price 675,000 620,000 '820,000, Esemsted cost to sell, as of sales 20% 15% 15% Cost of raw materials to date 120,000, 8,000 _P200,000 Cost of cirect labor to cate 70,000 60,000 '80,000 Cost of factory overhead to date 50,000 440,000 40,000 SSeling price upon completion 360,000 269,000 735,000 Estimated cost to complete 48,000 97,650 74,000 Replacement cost 208,000 168,000 375,000 Norma! profe margin as % of selling price 25% 35% “20% Raw Materials ~ Item M a 2 © cost 250,000 500,000. _P400,000 Current purchase price 250,000 480,000 375,000 aw Materals =item P x x 2 cost 400,000 | ©” 300,000 °"*'8200,000°**"™ Current purchase pitce 450,000 275,000 180,000 Raw Materials - item 2 E ct ee 375,000 450,000 rrent purchase price 38 4 Required: P 5,000 520,000 is unas the corret Finished gods inventory t be reported the stitement ef franca poston as oF? December 317 ‘RUDTTING PROBLEMS ~ PREWEEK WATERIALS (IRENEO/ESPENTLLA) 702RgSA: The Review School of Accountancy Page 19 of 28 a. 1,466,00 1,497,000 a ne tO, 3. 1,520,000 Is the correct Work-in-pracess inventory f0 be reported In the statemer ” at ee cox he statement of financial positio ‘2. 748,000 «650,200 Bb. 746,420 3 3. What is the corcect fetal row materi December 317 2. 2,765,000 ‘ b. 2{875/000 4 “4. -Whot is the total loss on inventory write-down to be reported for the period? 3. 183,000 143,000 b. 113,000 3 103,000 PROBLEM 23: AUDIT OF TRADE PAYABLES KBC Corporation, meat processing compacy, reporved the following balances on the iabilty portion of eS Statement of Financial Poskion ag of December 1, 2018: Current Liabilities ‘Accounts payable - trade 1,250,000 Estimated Premiums Labiity 2 ‘Accrued Compensated Absences 360,000 124,000 Deferred Tax Labilty ‘Adtional information: “The result of your purchases cut-of revealed the following results: ‘Dacember, 2018 Pur shoce Journal Enis " eceving f inwoe pacewng | Ame Tener Reser Mamber | Gare/Shipmene | reper cate gate | ld Tosa 1320 i353 on0,000 708 Geaination 100285: 33722 $0,000 | Fos Destination 100296 4227 70,000 [On Consignment 100257 17728 35,000 | F08 Shipping POPE "100296 13728 50,000 [Fos Desenaton 300298 tap Lys FOB Sipping pot “amunry, 3014 Purehese Sows] ents Recewvng | invoice 7 Remaris Report number | date/Shioment Se 100306 1335 7a0, 500 Foe Desinaten 100301 52/30 —1 50.000 | Fos shina joos0 490 ~|"70,0007— on Consignment 4003031472 is 75,000, FOB Shipping pom ‘Note: Inventory has been correctly set-up baseit'on an inventory count condacted on December 33, Sots wie eppropriete reconctaiton anc adjustments. b, The company ineugurated a Premiums Promotions Pan atthe beginning of 2017. under the said Fromovanel program, customers ar given frying pan for every 30 product label that they may oe ale to Prerner plas Pa, Tre custome’s may be abe redeem thelr premiums within 2 years Tom Goes aie amiapation fore prem’s redemption, the company acquired 20,000 uns of Png P38 per pan in 2017 (2,500 of which remained on hand at the end of 2047) and addons) ae een 2018 (the ending Inventory of premiums a the end of 2018 ' 6,000 units). The company 35,000 ou? and in 2018 were 1,500,000 and 3,800,000 respectively. The company further aan ie only 60% of the proauct labels wil be presented for premiums redemption. The srameees labiny per books, represented the Balance of the premiums labilty atthe end of 2037. Raosuments are yet to be made forthe current year for the sax habit account tied 15a) vacation leaves and 15 day/slck eaves every year, Ate beginning ot Enployes ar ert re scnatedabvoces (au prserted er book) was for 1.200 days combined 20:0, the ai fr coats rn prenon yer es empoee re alowed 0 cay Ove vacation and i nae rc on yes upon veh any Unise eaven ae frre In ued ic eaves a estes are formar tote srvequet year rrom ee unused | 2, adc ee reso and 30D were eed. Thre was a 10% reauwn | ae a a ere boas of tre aconed bly fF | employees salaries during the cree rested absences per bodks rfiected che beginring balance of the account, Adjustment for ‘at year-end is yet to be made. Employees are ent The deterred tax lability balance isthe net deferred tax consequence of the company’s premiums | octos which & tax deductiole when actual redemption occurs and prepayments which are tax ||) srantbid upon payment. Prepayments had odjusted balances of P1,120,000 and P970,000 at the ef (Of 2017 and 2018 respectively. GaOTTING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENTLLA)RiGSA: The Review Schoo! of Accountancy Page 20 of 28 tne form of 10% of net income after bonus Cut ‘e.The key officers of the company are given incentives in sported por books was at Doron 4ove come tax. The unadjusted net income of the company a6 re 5,450,000. 1. whats the correct balance ofthe Accounts Payable-trade as of December 31, 20187 ‘2. 1,170,000 , 1,420,000 , 1,100,000 1,220,000 2. whatis the balance of the Eeumated Premiums Liaities as of December 31, 20177 a 810,000 . 1,350,000, 3,700,000 2,220,000 3. what is the correct Premiums Expense to Be reported in 20187 "3,600,000 , 24160,000 ‘¢, 990,000 ‘4. 1,800,000 4k wna the correc Accrued Lab fo: Compensated Absences as of December 3, 20187 ‘2. 360,000 B, 445,500 ‘e. 405,000 ‘4, 396,000 1S. What is the correct deferred tax lability as of December 31, 208% a, 48,000 . 362,000 ‘e, 388,000 ¢, 358,400 «6. What fs the correct Accrued Bonus to key officers as of December 35, 20487 ‘a, 371,901 b. 356,569 fe. 333,450 6. 366,773 RORLet 24: AUDIT OF eg porto of nancial assets ax of December 3, 2048: ‘ll the Mnancial asset were acquired in 2018 ‘Acquisition Cost Financial asset ‘Aye Corp, Stocks, 20,000 shares 590,000 Gee inc Stocks, 40,000 shares 4,200,000 See Co, 10%, P2M bonds 4,973,000 400,000 Dee Corp. Seeks, 50,000 shares audit notes: sar aye Corp. shares were acquired wit ‘ivctuations. The compeny paid P29. Commissions, The shares were accu Seared on Maren 30. These dividends were [Sor recora date march 1, 2018, an intention of generating short-term profs from the share pres inert? gen clude the P.50 par share broker's eas #0 5D pet abruary 20, 2048. A P2 per share cash dividends Were February 20 ave Corp. on January 20, 2018 to stockholders ._-Tne company on 727.50 per sare including P0.50 Fe Se ONES rae, acquisition of Bee Ine The company goes Fhe shaves ware acgulea for trading PUBOSSE, 7 Oey See ‘vidends were on Marchi, 201 ged shares on May 2, 2018. These avidends were dedared 2° "Apri t6 stockholders Bs of record date Ap 20. <._ see Co, bonds which pay semi-annual intrest every June 20 7 OSretEOG, 31, were acquired on See Co. nt pc p1-973,000, when the pravating eter eres oO similar instrument was at Oxtober 1.70% sail manure on December 31, 2020. The company has Business model of holding debt ‘ecunties for short-term profits: fers’ fees and commissions on 1 per share, inéluding P3 per share brok ‘ate. The company 6. Bee Corp, stocks were acquired P&B ps See Comm tc cp, nad eta of 200,000 snares euttenging on the SAR une 30, 20 uhdends per share frm Dee on December 20, 2038 ormavon were deemed relevant x yearend and no eres had been made et DY 1 ‘e.The folowing i ‘of tne following information Company #9 reflec any ‘aye Corp. Bee INC see co Dee corp. Inet income in 2018 We 90,000 P1,500,000 F2,000,000 2,240,000 Far Vale P35/sh 25/sh 119% Psi/sh Requirements: Reaurerets ceed Roding guns tobe reported in te 2048 saterent of comprehensive income? ‘2, 51,948 © 1,948 b. 321,948 0, 122,750 a, whar is tne correct coring value af vestments eat shoud be resented #8 current asset? "2 3,664,948 ‘6 3,665,750 b, 3,543,000 6. 3,765,250 4, wnaels the mec carrying vale of ivestmaentin Ove Corp. shares tat stavdDe presented in the 2018 ‘Stavement of Financial Position? ‘2. 2,430,000 ‘¢, 2,280,000 <. 2,550,000 , 2,150,000 «a peactun tak eve company’s business model regarding det secures nes an obiecons oy ater Assuring hat on rari isthe correc caryng value of venient n See Go Bonds har shove be F018 Statement of Financial Position” presented in the >. 3,960,960 6. 1,965,750 , 3,932,690 6. 1,930,680 702 eyew saa amen Page 21 of 28 PRORLEN 25: AUDIT OF INVESTMENTS ‘On January 1, 2016 Ify Corp. acquired 90,000 shares ot AB i g corp. snares ct ABC Corp's 100,000 shares Teast eve of Alc ease et sss on thin date was Piha a ‘svat ‘carrying Veloe acca er vo care recioble assets with a remaining Ife of year, Wich wes ‘ABC reported total comprehensive income in 2018 at 4,000,000 which was net ange 1,000, was net of a foreign exchange loss ‘aported in as other comprehensive loss at PB00,000. ABC algo paid dividends at P1.5M at the end of the year, 800,000 of which is from preseauision Retained Earnings. The far market valve of shares on ti dete was at 210 per share. Requirements: 1. What Is the carrying valve of Ifty’s investiient in ABC shares as of December 31, 2018 using the appropriate accounting stenderds? a. $/654,000 <$,990,000 b. 5,750,000 3. 5,894,000 2. Assuming that Ify Corp. 16 8 meclum-sized entity and that the company uses the fair value method in ‘accounting for ts investment in ABC, how :nuch, mn total should be recognized in Ifty Corp.'s proft or loss for 2018? 2. 1,780,000. < 1,300,000 b. 450,000 4. 300, 3. Assuming that iffy Corp. sold 18,000 shares ofits ABC shares investment on December 31, 2018 at RS ‘prevailing fair value, how much in total sheuld be recognized in the proft or loss as a result of the transaction?” 387,600 «406,000 b. "646,000 4. 243,600 4. Using the information in the previous tem. how much shall be the carrying value of any remaining Investments es of December 31, 20:87 ‘a. 2,357,600 2,300,000 b._2'520,000 3. 2,261,600 'S. Assuming that ABC issued 25,000 shares to other stockholders on December 31, 2018 at prevailing far atue without iy Corp's participation, new much should be recognized ia the prof or 1055.25 @ result of the transaction/event? a." 81,200 129,200 B. 196,200 @, None 2018 reported the net property, plant and ‘The draft balance sheet of Rural Corporation a3 vf December ‘equipment at P6,270,000. Details of the araasrt follow Land at cost 1,000,000 Building at cost 4,000,000 Less accumulated depreciation, 2 12/31/37 3,200,000 Plant at cost 5,200,000 7 less accumulate depreciation at 12/31/17 (2.120.900) 2.070.000 6.270.000 ‘ual notes: Tie tompany polcy forall depreciation. is thet @ fll years charge is made in the year of acquisition or Completion and none in the year of disposal. ade in ne ales revenue 300,000 being the snes proceeds of nem of plat et mas sls on ne (©) Included none se say cost 900,000 and had boanaeprected Dy PEz0/00 as of Daca 3, 30,2018, The plant ad oa recede eles an aah no eer wccourtng eis for the dnpsal ot 7BOR7 sar nave been made, Al pant Is deprecieted at 25% per annum on the reducing balance Dass, (©) On September 30, 2018, the company completed the construction of a new warehouse, The construction ‘nas achieved using the company’s own resources a lows materials 0 rect labor ; Supervision 23/000 Sees and panning costs e000 To 2 as tet mat wen sc pgm ne ga 0.0m as a eo ers See et soe Dente ere re es eg par ee tin oe acl Bas Vc (0 eps. 0 cme ain nares a en (etree eat as vate earn wa ey a Sa asa snes nar ron ar, er Sa eg iS er ae ge ene 702 he wen ea pecan QUOTING PROBLEMS - PREWEEK MATERIALS (IRwg wm L105 ReSA: The Review Schoo! of Accountancy Page 22 of 28 (€) Depreciation for the year 2018 has not yet been accounted forthe inthe draft financial statements. questions: 1 - Based on the Abe an the fesut of your audit, answer the folowing: ew 1, The cBrrying amount of the new warenduse as of DecemBer 31.2018 1s a. 987,500 1,000,000 b,_ 969,250 3. 950,000 2. The carrying amount 6f plane as'ot December 31, 2018 is 21,710,000, © 1,282,500 ‘ 0 boa'375:310 4. 1,380,000 ¥ 3. The totel depreciation for the year ended December 31, 2018 1s 740;000 ©. 380,000 B. 738:750 6. 736,250 4. The revaluation surplus as'ot December 31, 2018 is ‘#.'17720,000 . 1,800,000 b. 1,710,000 « "960,000 ‘You were assigned to aust the Property, Plant anc Equipment of Kindness Corporation inline with your firm’, continuing-engagement to aude its financial statemerts05 of and for the period ended December 31, 2016. Your « rior year working papers included the following - analysis ofthe clients’ property, plant and equipment aoa Fee "accumulated [ Depreciation Methed/-— [Balances as of 12/31/2015 cost __| Depreciation | Useful ife 3 5 ‘Double decining balance, 20 Building ns years Machinery and Equipment ‘Straightline, 10 years — “Automative Equipment SYD, 8 years: = \ ‘Aue notes: ‘2. A four-year old autometive'egilpment with an original cost of P2,100,000 was.traded in for a new automotive equipment having @ cash price of P1,600,000 at tne beginning of 2036, The company paid ‘Adattional cash of P850,000. The new automotive equipment was recorded by the company et the cash © payment sradk “B)" A'miachinery which was acquired on Janubry of 2012 was totally destroyed by a fire on June 30, 2046. ‘The machinery was originally acquired at a Cost of P1,800,000, Areplacement machinery was acquired on September 4, 2016 on instaliment basis. The total installment bprice 's 3,837,054 and is payable five equal annual instaliments beginning September 1, 2016, The ‘company rs5ued @ noninterest bearing note in lieu ef the machinery, There is no estevliched pice for the ‘machinery. The prevaiting marker rate of interest for simlar secunties on the transaction dott mae se “10%, provements on the building's electrical wring system wad incurred at the beginning of the year I cot amounting to Pi,250,000 was recognized es outright repairs and maintenance expence 6. Major The to &_The’begioning balance of the automotive equipment would have been depreciated at total of P511,111 forthe year. f, *Salvage value of tne assets are considered immaterial. . Requirements: 1 What isthe gain oF loss from the trade in transaction in item a? 2. 266,667 ©. 125,000 b. 166,667 4. 1,016,667 a 2. What is the correct depreciation expense on the building for 2016? a. 698,108 687,693 b. 656,441 4. $31441 3. What isthe correct depreciation expense on machinery and equipment for 2016? 572,550 $46,970 577,902 . 556/667 4. What is the correct depreciation expense on automotive equipment for 20162 a. 455,555. © 575,000 b. 633,333 6. 466,657 5 Se ose On inary 1, 2014, MONICA CORP. acquired factory eaupeeTTR 3 COs of 40,000. Th 200. The equipment 1 bein etrecates ang te sragn-tne method overs prajeed unl Hac ID yeare sme peo can ee Soe ee, ‘On December 31, 2015, a determination was'made that the futur sh ows expected > re'net cas ° from the co: inerrant 060 per er Eumated see sae ens ose seh oe men ‘AUDITING PROBLEWS~ PREWEEK MATERIALS (GRE 10 /ESPENTLLA)RaSAE ThE Review Sthool of Accountancy Page 23 of 28 te. You ascertained that this was properly computed and {alr value tess cost to sell at 9220000 on che same dat Dravaiing Interest rate is 1056) that recognition of the impairment was warranted, (the ‘on becernber 31, 2017, the asset's replacement cost was determined to be PS5S,000 with a total feof 12 years fram date of acai, Savage ale stil estmeted to Be at P50,000, You also ascertained that this v ‘reasonable in the circumstance, ‘vou have been asked to assist the company’s accountant in the application of PAS 36, the standard on Impairment of assets, Required Ser nat isthe recoverable value of the asset on December 31, 20157, 2. 713,397 ‘by 236,722, «220,000 6. 320,000 12. How much impairment loss should be recognized cn Cecember 31, 20157 2, 133,278 b. 156,603, ‘c. 150,000 ° 53. what isthe asset's carrying amount on December 31, 2017, before revaluation? ‘8, 160,050 be 177,825 1. 190,082 172,548 “4, How much impairment recovery should be reporcet inthe 2017 income statement! 2, 155,475, be, 99,958. 142,975 ‘4. 117,450 5, What is the depreciation expense In 2012, unde the cost method”, a. 41,625 be 36,250 © 37,875 2. 30,000 «6. What is the depreciation expense in 2019, under the revaluation method? a. 41,625, 36,250 037,875 4. 30,000 7. what ts the belance of any revahudon surplus a the end of 2019, under the pieces realization? 63,000 a. 47,250 55125 © 52,500 PLES. les at the end of 2017 and, based on the acquisitions, reported PROPA Company acquired several small compar Tox? statement of financial position: the folowing intangibles in Rs December 37, Patent "200,000 ‘Copyright ‘400,000 Sradename 350,000 Computer sonwere 100,000 “Goodwill 900,000 ma company’s accountant. determines the Tae comeany’s Sr generace approximately ecual Benes cach YORE eet fexpacts (0 use the vane ard crores forte foreseen future, The ACcounans Anns capri and race prc. rhe company ne reoiced ae sfeuae n 60 OMe 2039, nd expects £0 oan cae nware in a0 more offices In 2019 ane te remninder 192020, Gh piceinber 3, 2018, tate ar’ ib stenoons of npakment of parent andeampen seer ‘The folloming Crormation relate tothe other intangitie assets 1) Because of ihe rampant pracy, he expyagh i expected ro generate 44h ‘of just P8,000 per year. tp) The tradename is expected to generate cash flows of 15,000 Pe Yr . Shareholders’ equty nas: preference shares, no par value, authorized 200,000 shares, sued 70,000 snares Seared erdmary snares, P00 par valve, auorized 400,000 shares; tssued 100,000 shares at an eee cr 10. In a0ation, the corporavon has retained earnings of 7320,000 ‘a, Te company’s management does not elect to use the fax value option for any of WS fnancial assets o¢ hapates (Questions: CEST: ave and the result of your audt, compute the adusted amount of the fallwing to be reported on Farts ipany’s statement of financial poston es of December 31, 2038: 4. Current assets (2. 588,000 «$34,000 b. 574,000 4 $48,000 2. Noncurrent investments ‘2. '560,000 830,000 . 520,000 , 790,000 3. Propery, plant and equipment 2. 1,615,000 1,450,000 4, 1,720,000 4 2,814,000 6. 3,093,000 Current abities «210,000 229,000 . 224,000 4. 215,000