AUDITING PROBLEM REVIEW

Correction of Errors

Problem 1(6-2)

You discovered the following errors in connection with your examination of the
financial statements of Pau Corporation:

a. Accrued interest expense of Php30,000 was not recorded at the end of 2016.
b. Accrued rent receivable of Php40,000 was not recorded at the end of 2016
c. The company paid one-year insurance premium of Php72,000 effective March
1, 2016. The entire amount was debited to expense account and no adjustment
was made at the end of 2016.
d. The company leased a portion of its building for Php60,000. The term of the
lease is one year ending April 1, 2017. Collection of rent was credited to rent
revenue account. At the end of 2016, no entry was made to take up the
unearned portion of the amount collected.

The following data were extracted from the financial statements of Pau Corporation:
2016 2017
Net Income Php 400,000 Php 320,000
Working capital 360,000 520,000
Retained Earnings, end 400,000 720,000

Based on the foregoing data, determine the following:

1. Net Income in 2016, ______________.
2. Working capital, end of 2016 __________.
3. Retained earnings, end of 2016 ____________.
4. Net Income in 2017, ________________.
5. Working capital, end of 2017 ___________.
6. Retained earnings, end of 2017 ____________.
7. Prepare adjusting entries assuming errors were discovered in (a) 2016; (b) 2017;
and (c) 2018.

NI(2016) WC (2016) RE(2016) NI (2017) WC(2017) RE(2017)

UBal 400,000 360,000 400,000 320,000 520,000 720,000
a. ( 30,000) ( 30,000) ( 30,000) 30,000 - -
b. 40,000 40,000 40,000 ( 40,000) - -
c. 12,000 12,000 12,000 ( 12,000) - -
d. ( 15,000) ( 15,000) ( 15,000) 15,000 - -
---------------------------------------------------------------------------------------------------------
407,000 367,000 407,000 313,000 520,000 720,000
============================================================

Errors were discovered in 2016

1. Interest expense 30,000
Interest payable 30,000
2. Interest receivable 40,000
Interest revenue 40,000
3. Prepaid insurance 12,000
Insurance expense 12,000
4. Rent revenue 15,000
Unearned rent revenue 15,000

Errors were discovered in 2017 (Assuming books still open)

1. Retained earnings 30,000
Interest expense 30,000
2. Interest revenue 40,000
Retained earnings 40,000
3. Insurance expense 12,000
Retained earnings 12,000
4. Retained earnings 15,000
Rent revenue 15,000
When the books are already closed, no necessary adjusting entries to be made.

Errors were discovered in 2018 (No necessary adjusting entries to be made)

Problem 2 (6-5)

You have been asked by a client to audit financial statements of Camil Company for the
first time. In examining the books, you found out that certain adjustments had been
overlooked at the end 2016 and 2017. You also discovered that other items had been
improperly recorded. These omissions and other failures for each year are summarized
below:
2016 2017
Inventory, end Php 20,000 (O) Php 16,000 (U)

Advances to supplier were

recorded as purchases but
the merchandise was received
in the following year. 40,000 80,000

Advances from customers

recorded as sales but the
goods were delivered in
in the following year 40,000 140,000

Improvements on building
had been charged as expense
on January 1, 2016. Improvements
have a life of 5 years 200,000

On January 1, 2016, an equipment costing Php80,000 was sold for Php40,000. At the
date of sale, the equipment had an accumulated depreciation of Php30,000. The cash
received was recorded as other income in 2016.

Required:
1. What is the total effect of the errors on the 2016 net income?
a. Understated by Php90,000
b. Understated by Php50,000
c. Overstated by Php230,000
d. Understated by Php10,000
e. Answer not given

2. What is the total effect of the errors on the 2017 net income?
a. Overstated by Php64,000.
b. Overstated by Php16,000.
c. Overstated by Php136,000
d. Overstated by Php76,000
e. Answer not given.

3. What is the total effect of the errors on the company’s working capital at
December 31, 2017?
a. Overstated by Php44,000.
b. Understated by Php96,000.
c. Overstated by Php140,000.
d. Overstated by Php60,000.
e. Answer not given.
 4. What is the total effect of the errors on the balance of the company’s retained
earnings at December 31, 2017?
a. Understated by Php26,000.
b. Understated by Php34,000.
c. Overstated by Php366,000.
d. Overstated by Php66,000.
e. Answer not given.

5. Necessary adjusting journal entries at December 31. 2017 would require a net
a. Debit to R/E Php90,000.
b. Credit to sales Php100,000.
c. Credit to Purchases Php40,000.
d. Debit to Equipment Php80,000.
e. Answer not given

Effects of Error in
NI(2016) NI(2017) WC (2017)
Invty, end – 2016 (O); NI (O) 20,000 ( 20,000)
Invty, end-2017 (U); NI (U) ( 16,000) (16,000)

Purchases (O); NI (U) ( 40,000) 40,000

( 80,000) (80,000)

Sales (O), NI (O) 40,000 ( 40,000)

140,000 140,000

Expenses (O), NI (U) ( 160,000)

200,000- (200,000/5)-160,000
Deprc exp. (U), NI (O) 40,000

Other Income (O); NI (O) 40,000

Loss (U); NI (O) 10,000
-----------------------------------------------
( 90,000) 64,000 44,000
===========================
U O O

Selling Price Php 40,000

Less: NBV
Cost Php 80,000
Less: Accum deprec 30,000
------------------- 50,000
--------------------
Loss on sale Php 10,000
===========

Effect of errors to Retained Earnings in 2017

Understatement to 2016 net income Php 90,000
Overstatement to 2017 net income 64,000
-------------------
Net understatement to 2017
retained earnings Php 26,000
===========

Adjusting Journal Entries

1. Retained earnings, beginning 20,000
Merchandise inventory, end 20,000
 Merchandise inventory,end 16,000
Cost of sales 16,000
2. Purchases 40,000
Retained earnings 40,000
Advance supplier 80,000
Purchases 80,000
3. Retained earnings, beg 40,000
Sales 40,000
Sales 140,000
Advances from customers 140,000
4. Depreciation expense 40,000
Improvements 200,000
Accum deprec 80,000
Retained earnings 160,000
5. Accum deprec 30,000
Retained earnings, beg 50,000
Equipment 80,000

Problem 3 (6-1)

You discovered the following errors in connection with your examination of the financial
statements of Mari Company:
a. Rental income of Php50,000 for 2016 was credited to Miscellaneous income
account.
b. Payment of Notes payable amounting to 56,000 was debited to Accounts
payable.
2016 2017
Net Income Php 400,000 Php 320,000
Working capital 360,000 520,000
RE, end of the year 400,000 720,000

Required : Based on the foregoing data, Compute the following:

1. Net Income in 2016
a. Php400,000 c. Php450,000
b. Php406,000 d. Php456,000
e. answer not given.

2. Working capital, end of 2016

a. Php304,000 c. Php416,000
b. Php360,000 d. Php450,000
e. Answer not given.

3. Retained earnings , end of 2016

a. Php400,000 c. Php450,000
b. Php406,000 d. Php456,000
e. Answer not given.

4. Net income in 2017

a. Php214,000 c. Php320,000
b. Php270,000 d. Php370,000
e. Answer not given

5. Working capital, end 2017

a. Php464,000 c. Php520,000
b. Php456,000 d. Php570,000
e. Answer not given
 6. Retained earnings, end of 2017
a. Php550,000 c. Php720,000
b. Php620,000 d. Php826,000
e. Answer not given.

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017,
and (c ) 2018.

NI(2016) WC(2016) RE(2016) NI(2017) WC(2017) RE(2017)

UBal 400,000 360,000 400,000 320,000 520,000 720,000

a - - - - - -
b - - - - - -
-------------------------------------------------------------------------------------------------------
400,000 360,000 400,000 320,000 520,000 720,000
===========================================================

Assuming errors were discovered in 2016

a. Miscellaneous income 50,000
Rent income 50,000
b. Notes payable 56,000
Accounts payable 56,000

Assuming errors were discovered in 2017

a. no entry
b. Notes payable 56,000
Accounts payable 56,000

Assuming errors were discovered in 2018

a. no entry
b. Notes payable 56,000
Accounts payable 56,000

Problem 4 (6-4)

You discovered the following errors in connection with your examination of the
financial statements of Alexis Company:

a. The company paid one-year insurance premium of Php36,000

effective March 1, 2016. The entire amount was debited to asset
account and no adjustments was made at the end of 2016.
b. The company leased a portion of its building for Php30,000. The
term of the lease is one year ending April 30, 2017. Collection of rent
was credited to unearned rent revenue account. At the end of 2016 ,
no entry was made to take up the earned portion of the amount
collected.
c. Depreciation expense in 2016 was overstated by Php12,000.
d. Improvements on building amounting to Php200,000 had been
charged to expense on January 1, 2016. Improvements have a life of
4 years.
e. On January 1, 2016, an equipment costing Php60,000 was sold for
Php20,000. At the date of sale , the equipment had an accumulated
depreciation of Php48,000. The cash received was recorded as other
income in 2016.
f. Repairs expense on the building amounting to Php20,000 had been
charged to the building account on January 1, 2016. Depreciation
expense has been recorded in 2016 to 2017 based on the 4 year
remaining useful life of the building.
The following data were extracted from the financial statements of Pau Company:
2016 2017
Net Income Php 200,000 Php 160,000
Working capital 180,000 260,000
RE, end of the year 200,000 360,000

Required: Compute the following:

1. Net income in 2016

a. Php194,000 c. Php216,500
b. Php206,000 d. Php325,000
e. Answer not given

2. Working capital, end of 2016

a. Php170,000 c. Php196,500
b. Php192,000 d. Php202,500
e. Answer not given

3. Retained earnings, end of 2016

a. Php194,000 c. Php216,500
b. Php206,000 d. Php325,000
e. Answer not given

4. Net Income in 2017

a. Php119,000 c. Php159,000
b. Php154,000 d. Php161,500
e. Answer not given

5. Working capital, end of 2017?

a. Php254,000 c. Php276,000
b. Php260,000 d. Php267,500
e. Answer not given

6. Retained earnings, end of 2017

a. Php350,000 c. Php366,000
b. Php360,000 d. Php444,000
e. Answer not given

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017,
and (c) 2018.

NI(2016) WC(2016) RE(2016) NI(2017) WC(2017) RE(2017)

UBal 200,000 180,000 200,000 160,000 260,000 360,000
a ( 30,000) ( 30,000) ( 30,000) ( 6,000) ( 36,000) ( 36,000)
b 20,000 20,000 20,000 10,000 30,000 30,000
c 12,000 - 12,000 - - 12,000
d. 150,000 - 150,000 ( 50,000) - 100,000
e. ( 12,000) - ( 12,000) - - ( 12,000)
f. ( 15,000) - ( 15,000) 5,000 - ( 10,000)
-------------------------------------------------------------------------------------------------------
325,000 170,000 325,000 119,000 254,000 444,0000
===========================================================

Errors were discovered in 2016

a. Insurance expense 30,000
Prepaid insurance 30,000
b. Unearned rent revenue 20,000
Rent revenue 20,000
c. Accumulated depreciation 12,000
Depreciation expense 12,000
d. Building improvements 200,000
Repairs expense 200,000
 Depreciation expense 50,000
Accumulated depreciation 50,000
e. Other income 20,000
Accumulated depreciation 48,000
Gain on sale 8,000
Building 60,000
f. Repairs expense 20,000
Building 20,000
Accumulated depreciation 5,000
Depreciation expense 5,000

Errors were discovered in 2017

a. Retained earnings 30,000
Insurance expense 6,000
Prepaid insurance 36,000
b. Unearned rent revenue 30,000
Retained earnings 20,000
Rent revenue 10,000
c. Accumulated depreciation 12,000
Retained earnings 12,000
d. Building improvements 200,000
Retained earnings 200,000
Depreciation expense 50,000
Retained earnings 50,000
Accumulated depreciation 100,000
e. Retained earnings 12,000
Accumulated depreciation 48,000
Building 60,000
f. Retained earnings 20,000
Building 20,000
Accumulated depreciation 10,000
Retained earnings 5,000
Depreciation expense 5,000

Errors were discovered in 2018

a. Retained earnings 36,000
Prepaid insurance 36,000
b. Unearned rent revenue 30,000
Retained earnings 30,000
c. Accumulated depreciation 12,000
Retained earnings 12,000
d. Building improvements 200,000
Retained earnings 200,000
Depreciation expense 50,000
Retained earnings 100,000
Accumulated depreciation 150,000
e. Retained earnings 12,000
Accumulated depreciation 48,000
Building 60,000
f. Retained earnings 20,000
Building 20,000
Accumulated depreciation 10,000
Retained earnings 10,000
Problem 5 (6-3)

You discovered the following errors in connection with your examination of the
financial statements of Mari Corporation:

1. Purchase of inventory on account on December 24, 2016 amounting to

Php120,000 was not recorded until it was paid in January 2017. The
merchandise was properly included in the ending inventory 2016.
2. Sale of merchandise on account on December 30, 2016 amounting to
Php160,000 was not recorded until it was collected in January 2017. The
merchandise was properly excluded in the ending inventory in 2016.
3. On December 31, 2016, the ending inventory was overstated by Php40,000.

The following data were extracted from the Statement of Financial Positon of Mari
Corporation:
2016 2017
Net Income Php 400,000 Php 320,000
Working Capital 360,000 520,000
Retained earnings, end 400,000 720,000

Required: Compute the following:

1. Net income in 2016
2. Working Capital, end of 2016
3. Retained Earnings, end of 2016
4. Net Income in 2017
5. Working Capital, end of 2017
6. Retained Earnings, end of 2017
7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017,
and (c ) 2018.

NI(2016) WC(2016) RE(2016) NI(2017) WC(2017) RE(2017)

UBal 400,000 360,000 400,000 320,000 520,000 720,000
1. ( 120,000) (120,000) (120,000) 120,000 - -
2. 160,000 160,000 160,000 ( 160,000) - -
3. ( 40,000) ( 40,000) ( 40,000) 40,000 - -
-------------------------------------------------------------------------------------------------------
400,000 360,000 400,000 320,000 520,000 720,000
===========================================================
Errors discovered in 2016
1. Purchases 120,000
Accounts payable 120,000
2. Accounts receivable 160,000
Sales 160,000
3. Cost of sales 40,000
Inventory 40,000
Errors discovered in 2017 (Assuming errors are discovered when the cash flows
related to the transactions were processed and books are still open)
1. Retained earnings 120,000
Purchases 120,000
2. Sales 160,000
Retained earnings 160,000
3. Retained earnings 40,000
Inventory, beginning 40,000

If books are already closed, no necessary adjusting entries to be made.

Errors were discovered in 2018

No necessary adjusting entries to be made
Problem 6 (6-6)

Pau Company is a calendar-year corporation. Its financial statements for the years 2016
and 2017 contained errors as follows:

2016 2017
Ending inventory Php 12,000 (U) Php 20,000 (O)
Depreciation expense 22,000 (O) 14,000 (O)
Accrued expenses 9,000 (U) 15,000 (U)
Prepaid expenses 10,000 (U) 24,000 (U)
Accrued revenues - 6,000 (U)
Deferred revenues 2,400 (U) -

1. What is the total effect of the errors on the 2016 net income?
a. 25,000 understated c. 25,000 overstated
b. 32,600 overstated d. 32,600 understated
e. answer not given

2. What is the total effect of the errors on the company’s working capital at
December 31, 2016?
a. 4,600 overstated c. 4,600 understated
b. 10,600 understated d. 10,600 overstated
e. answer not given

3. What is the total effect of errors on the 2017 net income

a. 1,600 overstated c. 1,600 understated
b. 56,400 overstated d. 56,400 understated
e. answer not given

4. What is the total effect of the errors on the balance of the company’s working
capital at December 31, 2017?
a. 5,000 overstated c. 5,000 understated
b. 53,000 understated d. 53,000 overstated
e. answer not given

5. What is the total effect of the errors on the balance of the company’s retained
earnings at December 31, 2017?
a. 31,000 overstated c. 31,000 understated
b. 39,000 overstated d. 39,000 understated
e. answer not given

NI(2016) WC(2016) NI(2017) WC(2017) RE(2017)

EI, 2016 (U),NI(U) (12,000) (12,000) 12,000 - -
EI, 2017(O),NI(O) 20,000 20,000 20,000

Depr 2016(O),
NI(U) ( 22,000) ( 22,000)
Depr 2017(O),
NI(U) ( 14,000) ( 14,000)

Accrued Exp
2016(U), NI(O) 9,000 9,000 ( 9,000)
Accrued Exp
2017 (U), NI(O) 15,000 15,000 15,000

Prepaid exp
2016(U), NI(U) ( 10,000) (10,000) 10,000
Prepaid exp
2017(U), NI(U) ( 24,000) ( 24,000) ( 24,000)
Accrued Rev
2017(U), NI(U) ( 6,000) ( 6,000) ( 6,000)

Deferred revenues
2016(U), NI(O) 2,400 2,400 ( 2,400)
-------------------------------------------------------------------------------------
( 32,600) ( 10,600) 1,600 2,500 ( 31,000)
================================================
Problem 7 (6-8)

You are given the following post-closing trial balance of Mari Company for December
31, 2017:
Debits Credits
Cash Php 714,000
Accounts receivable 480,000
Allowance for doubtful accounts Php 16,000
Prepaid expenses 32,400
Merchandise inventory, end 360,000
Land 400,000
Building 1,000,000
Accumulated depreciation-Bldg 300,000
Equipment 784,000
Accum depreciation-Equipt 518,400
Accounts payable 520,000
Advances from customers 20,000
Interest payable 36,000
Unearned rent revenue 60,000
Mortgage payable 1,200,000
Ordinary shares 800,000
Retained earnings 300,000
------------------------------------------------
Php 3,770,400 Php 3,770,400
============================

Your examination of the company’s accounts disclosed the following information:

a. Advertising expense for December 2016, amounting to Php50,000, was recorded
when payment was made by the firm in January 2017.
b. Advances from customers recorded as sales but the goods were delivered in the
following year:
2016 Php 60,000
2017 100,000
c. Advances to supplier were recorded as purchases but the merchandise was
received in the following year:
2016 Php 50,000
2017 80,000
d. A fully depreciated equipment without scrap value was sold on October 1, 2017.
The cost of the machinery is Php400,000. This equipment had been fully
depreciated since July 1, 2017. The proceeds from sale amounting to Php64,000
was credited to equipment when it was sold. Depreciation expense of 10% is
provided on the equipment based on the year-end balance.

e. The company leased leased a portion of its building for Php60,000. The term of
the lease is one year ending April 30, 2017. Collection of rent was credited to
unearned rent revenue account. No adjusting entry has yet been made in 2016
and 2017.

f. An allowance for doubtful accounts equal to 5% of accounts receivable should

be established at the end of the year.
g. Merchandise inventories at the end of 2017 did not include merchandise that
was then in transit and to which the company had title. These shipments of
Php20,000 were recorded as purchases in January 2010.

h. Insurance premium covering the period from June 1, 2017 to June 1, 2018,
amounting to Php36,000 was paid and recorded as expense on June 1, 2017.
The company did not make any adjustments at the end of the year.

i. The company recorded an unadjusted net income of Php200,000 during the year
2017.

Required:

1. Net Income 2017

a. Php314,600 c. Php344,600
b. Php317,800 d. Php337,800
e. answer not given.

2. Total current assets

a. Php1,776,400 c. Php1,662,400
b. Php1,646,400 d. Php1,677,400
e. answer not given.

3. Total noncurrent assets

a. Php1,463,200 c. Php1,379,200
b. Php1,364,800 d. Php1,443,200
e. answer not given.

4. Total current liabilities

a. Php696,000 c. Php646,000
b. Php746,000 d. Php676,000
e. answer not given

5. Retained earnings end of 2017

a. Php409,600 c. Php462,800
b. Php396,000 d. Php424,600
e. answer not given.

NI(2017) CA NCA CL RE
200,000 1,570,400 1,365,600 636,000 300,000
Adv exp(O)
NI (U) 50,000

Adv Rec on
Sales
2016 60,000
2017 ( 100,000) 100,000 ( 100,000)

Adv Rec
as Purch
2016 ( 50,000)
2017 80,000 80,000 80,000

Gain(U) 64,000 64,000

Cost (U) ( 336,000)

Accum deprec 400,000

Deprc (O)
NI(U) 13,600 13,600 13,600

Rent Rev(U) 20,000 ( 60,000) 60,000

Bad debt
Exp (U)
(5%x480K)-
16,000 ( 8,000) ( 8,000) ( 8,000)

Purch(U), 20,000
EI(U) 20,000

Ins Exp(U),
NI(O) 15,000 15,000
--------------------------------------------------------------------------------------
344,6001 1,662,400 1,443,200 696,000 424,600
=================================================