Audit Problems

Tabunggao, Shane Josa Marie M.
ACCP302 AC32
AUDIT OF CASH AND CASH EQUVALENTS

SUMMARY
AUDIT OBJECTIVES:
- To determine whether cash exists at year-end and cash-related transactions occur within
the year.
- To determine that all cash balances of the client are reflected on the statement of
financial position at year-end.
- To determine whether all cash transactions are recorded in the proper accounting period.
- To determine that cash balances are available for use without restrictions or if with
restrictions, properly indicated in the statement of financial position.
- To determine if cash is recorded and presented at the proper amount.
- To determine whether cash is presented in accordance with generally accepted
accounting principle.
AUDIT PROCEDURES:
- Obtain analysis of cash balances and reconcile to the general ledger.
- Confirm bank balances as of the statement of financial position date.
- Perform cash count procedures for cash on hand
- Obtain (prepare) bank reconciliations as of the statement of financial position date.
- Trace all transfers occurring between banks near year-end.
- Obtain a cutoff bank statement containing transactions several days subsequent to the
statement of financial position date.
- Prepare proof of cash and reconcile cash transactions occurring during a specified
period as they are recorded by the bank and the client.
- Verify the client’s cutoff of cash receipts and cash disbursements.
- Review bank statements and bank’s replied to confirmation letters.
- Verify existence of cash in bank under receivership, cash in foreign banks or in foreign
currency.
- Investigate any checks representing large or unusual payments to related parties.
- Evaluate proper financial statement presentation and disclosure of cash.
CASH
Cash includes money and other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
ACCP302 AC32
CASH ITEMS INCLUDED IN CASH

• Cash on hand – Includes undeposited cash collections and other cash items awaiting
deposit such as customer’s checks, cashier’s or manager’s checks, traveler’s checks, bank drafts,
and money orders
• Cash in bank – Includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal.
• Cash fund – which are set aside for current purposes such as petty cash fund, payroll
fund, and dividend fund.
CASH EQUIVALENTS
According to PAS 7, paragraph 6, cash equivalents are short-term and highly liquid
investments that are readily convertible into cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates. The standards further
states that only highly-liquid investments that are acquired three months before maturity date can
qualify as cash equivalents.
Examples of cash equivalent:
• Time deposit
• Money market instrument or commercial paper
• Treasury bills, treasury notes, and treasury bonds
• Redeemable preference shares with mandatory redemption period.
Items Measurement
Cash Face value
Cash in foreign currency Current exchange date (balance sheet date)
Cash in foreign bank a. unrestricted – included in cash
b. restricted – cash restricted in foreign bank
Cash fund set for a purpose a. use in current operations – classified as current asset
b. use in non-current operations – classified as long–term
investments
Investments a. three months or less – cash equivalents
b. more than three months but within one year – marketable
securities or short term investments
c. more than one year – long term investments
Compensating balance a. not legally restricted – part of cash
b. legally restricted – reclassified as cash held as compensating
balance.
Undelivered checks Checks that is drawn and recorded but is not given to payees is
still cash of the entity.
Post-dated checks delivered Checks that sent to payees but has a date subsequent in the
reporting period is still part of the cash of the entity.
Bank overdraft a. different banks – current liability or may be netted against
other bank if immaterial; netted against other account if it is
ACCP302 AC32
part of cash management

b. same bank – maybe netted against the account with positive
amount but cannot be offset against restricted account.
Stale checks a. material – reverted to cash by accounts payable
b. immaterial – reverted to cash by miscellaneous income
IOUs Included as part of receivable
Equity securities Generally cannot be classified as cash equivalents because
equity securities do not have a maturity date (exception:
redeemable preference shares)
Callable preference shares Not classified as cash equivalents instead it is part of
shareholder’s equity on the part of issuer and part of long-term
investment of the holder.
No sufficient funds (NSF)/Drawn against Reverted back as part of receivables
uncleared deposits (DAUD)/ Drawn against
insufficient funds (DAIF) checks
Expense advances Receivable or prepaid expense
Temporary investments in shares of stocks Either FVTPL or FVTOCI but NEVER to be included as part of
cash and cash equivalents.
Unused credit line Disclosed in notes
Treasury warrants Included as part of cash
Escrow deposit Part of other current/noncurrent asset and reported as liability
Postage stamps on hand Reported as office supplies or as a prepaid expense
Unrecorded cash disbursements Record the disbursements by:
Dr A/P or other appropriate account xxx
Cr Cash xxx
Unrecorded cash collections/receipts Record the collections by:
Dr Cash xxx
Cr A/R or any other appropriate account
xxx
NOTE:
- If an item cannot be included as cash equivalent because it did not qualify the cut-off
period (i.e. three months), it will always be classified as investments (short term or long term)
depending on the period up to maturity.
- The reckoning period for time deposit is its duration since time deposit generally does
not have secondary market. For other securities with secondary market, the reckoning period
would be three months from the acquisition date until maturity date.
If the problem is silent with regard to:
• Treasury note and bonds – assumed non-current investment
ACCP302 AC32
• Cash in money market account – cash and cash equivalent

• Time deposit - cash and cash equivalent
PROBLEMS:
1. You were able to gather the following from the December 31, 2021 trial balance of RV
Corporation in connection with your audit of the company:
Cash on hand P 700,000
Petty cash fund 11,000
BPI current account 1,500,000
Security Bank current account No. 01 1,050,000
Security Bank current account No. 02 (50,000)
PNB savings account 1,300,000
PNB time deposit 520,000
Cash on hand includes the following items:

a. Customer’s check for P30,000 returned by bank on December 26, 2021 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2022.
b. Customer’s check for P20,000 dated January 2, 2022, received on December 29, 2021.
c. Postal money orders received from customers, P40,000.
The petty cash fund consisted of the following items as of December 31, 2021. Currency and
coins P 2,000
Employees’ vales 1,800
Currency in an envelope marked “collections for charity”
with names attached 1,200
Unreplenished petty cash vouchers 1,500
Check drawn by RV Corporation, payable
to the petty cashier 4,600
P11,100
Included among the checks drawn by RV Corporation against the BPI current account and
recorded in December 2021 are the following:
a. Check written and dated December 29, 2021 and delivered to payee on January 2, 2022,
P50,000.
b. Check written on December 27, 2021, dated January 2, 2022, delivered to payee on December
29, 2021, P40,000.
The credit balance in the Security Bank current account No. 2 represents checks drawn in excess
of the deposit balance. These checks were still outstanding at December 31, 2021.
The savings account deposit in PNB has been set aside by the board of directors for acquisition
of new equipment. This account is expected to be disbursed in the next 3 months from the
balance sheet date.
Determine the following:

ACCP302 AC32
a. Cash on hand
b. Petty cash fund
c. Adjusted BPI current account
d. Cash and cash equivalents
Solutions:
a. Unadjusted cash on hand P 700,000
NSF check (30,000)
Post dated check received (20,000)
Adjusted cash on hand P 650,000
b. Currency and coins P 2,000
Replenishment check 4,600
Petty cash fund P 6,600
c. Unadjusted BPI current account P 1,500,000
Unreleased check 50,000
Post dated check delivered 40,000
Adjusted BPI current account P 1,590,000
d. Cash on hand P 650,000

Petty cash fund 6,600
BPI current account 1,590,000
Security Bank current account (net) 1,000,000
PNB time deposit 520,000
Cash and cash equivalents P 3,766,600
2. The books of KARA, Inc. disclosed a cash balance of P687,570 on December 31, 2021. The
bank statement as of December 31 showed a balance of P597,500. Additional information that
might be useful in reconciling the two balances follows:
a. Check number 748 for P30,000 was originally recorded on the books as P45,000. b. A
customer's note dated September 25 was discounted on October 12. The note was dishonored on
December 29 (maturity date). The bank charged KARA's account for P142,650, including a
protest fee of P2,650.
c. The deposit of December 24 was recorded on the books as P28,950, but it was actually a
deposit of P27,000.
ACCP302 AC32
d. Outstanding checks totaled P98,850 as of December 31.

e. There were bank service charges for December of P2,100 not yet recorded on the books.
f. KARA's account had been charged on December 26 for a customer's NSF check for P12,960.
g. KARA properly deposited P6,000 on December 3 that was not recorded by the bank.
h. Receipts of December 31 for P134,250 were recorded by the bank on January 2.
i. A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee

a. Adjusted cash balance
b. Net adjustment to cash at year-end
Solutions:
a. Balance per bank statement, 12/31/21 P 597,500
Add: Deposits in transit P 134,250
Bank error-deposit not recorded 6,000 140,250
Total 737,750
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/21 P 638,900
Balance per books, 12/31/21 P 737,270

Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 798,560
Less: Dishonored note 142,650
Book error-improperly recorded deposit 1,950
NSF check 12,960 Bank service charges 2,100 159,660
Adjusted book balance, 12/31/21 P638,900
b. Unadjusted balance per books, 12/31/21 P 737,270

Adjusted book balance, 12/31/21 638,900
Net adjustment to cash – credit P 98,370
3. Shown below is the bank reconciliation for Happiness Company for November 2021:
Balance per bank, Nov. 30, 2021 P 250,000
Add: Deposits in transit 24,000
Total 274,000
Less: Outstanding checks P 28,000
Bank credit recorded in error 20,000 48,000
Cash balance per books, Nov. 30, 2021 P 226,000
The bank statement for December 2021 contains the following data:
Total deposits P 120,000
ACCP302 AC32
Total charges, including an NSF check of P10,000 and

a service charge of P800 98,000
All outstanding checks on November 30, 2021, including the bank credit, were cleared in the
bank in December 2021.
There were outstanding checks of P40,000 and deposits in transit of P28,000 on December 31,
2021.
a. Cash balance per bank at year-end
b. December receipts per books
c. December disbursements per books
d. Cash balance per book at year-end
Solutions:
a. Balance per bank, Nov. 30, 2021 P 250,000
Add: Total deposits per bank statement 120,000
Total 370,000
Less: Total charges per bank statement 98,000
Balance per bank, Dec. 31, 2021 P 272,000
b. Total deposits per bank statement P 120,000

Less: deposits in transit, Nov. 30 24,000
Dec. receipts cleared through the bank 96,000
Add: deposits in transit, Dec. 31 28,000
December receipts per books P 124,000
c. Total charges per bank statement P 98,000

Less: Outstanding checks, Nov. 30 P 28,000
Correction of erroneous bank credit 20,000
December NSF check 10,000
December bank service charge 800 58,800
Dec. disbursements cleared through the bank 39,200
Add: outstanding checks, Dec. 31 40,000
December disbursements per books P 79,200
d. Balance per books, Nov. 30, 2021 P 226,000

Add: December receipts per books 124,000
Total 350,000
Less: December disbursements per books 79,200
Balance per books, Dec. 31, 2021 P 270,800
4. The accountant for the Red Summer assembled the following data:
ACCP302 AC32
June 30 July 31
Cash account balance P 18,822 P 42,574
Bank statement balance 97,082 117,617
Deposits in transit 8,200 12,750
Outstanding checks 28,000 31,000
Bank service charge 80 69
Customer’s check deposited July 10, returned by bank 8,350
on July 16 marked as NSF, and redeposited
immediately; no entry made on books for return or
redeposit
Collection by bank of company’s notes receivable 70,810 81,000
The bank statement and the company’s cash records show these totals:
Disbursements in July per bank statement P 220,373
Cash receipts in July per Red Summer’s books 240,452

a. Adjusted cash balance as of June 30
b. Adjusted bank receipts for July
Solution:
Beginning
June 30 Receipts
Balance per bank statement 97,082 240,908*
Deposits in transit:
June 30 8,200 (8,200)
July 31 12,750
Outstanding checks:
June 30 (28,000)
July 31
NSF check redeposited (8,350)
Adjusted bank balance P 77,282 P 237,108
*117,617 + 220,373 – 97,082
5. You obtained the following information on the current account of Summer Magic Company
during your examination of its financial statements for the year ended December 31, 2021.
The bank statement on November 30, 2021 showed a balance of P356,000. Among the bank
credits in November was customer’s note for P100,000 collected for the account of the company
which the company recognized in December among its receipts. Included in the bank debits were
cost of checkbooks amounting to P1,200 and a P40,000 check which was charged by the bank in
error against Summer Magic Co. account. Also in November you ascertained that there were
deposits in transit amounting to P90,000 and outstanding checks totaling P170,000.
ACCP302 AC32
The bank statement for the month of December showed total credits of P516,000 and total
charges of P104,000. The company’s books for December showed total debits of P835,600, total
credits of P407,000 and a balance of P485,000. Bank debit memos for December were: No. 131
for service charges, P1,600 and No. 132 on a customer’s returned check marked “Refer to
Drawer” for P25,000.
On December 31, 2021 the company placed with the bank a customer’s promissory note with a
face value of P120,000 for collection. The company treated this note as part of its receipts
although the bank was able to collect on the note only in January, 2022.
A check for P4,960 was recorded in the company cash payments books in December as P49,600.

a. Undeposited collections at year-end
b. Outstanding checks at year-end
Solutions:
a.
Deposits in transit, 11/30/21 P 90,000
Add: Collections in December
December book receipts P 835,600
Less: receipts not representing collections
in December:
Customer’s note collected by bank in
Nov. recorded in Dec. P 100,000
Uncollected customer's note treated as receipts 120,000 220,000 615,600 Total
705,600
Less: Deposits credited by the bank in December:

December bank receipts P516,000
Less: receipts not representing deposits:
Erroneous bank debit, Nov.; corrected Dec. 40,000 476,000
Deposits in transit, 12/31/21 P 229,600
6. The RBB Corporation was organized on January 15, 2021 and started
operation soon thereafter. The Company cashier who acted also as the
bookkeeper had kept the accounting records very haphazardly. The manager
suspects him of defalcation and engaged you to audit his account to find out the
extent of the fraud, if there is any.
On November 15, when you started the examination of the accounts, you find
the cash on hand to be P25,700. From inquiry at the bank, it was ascertained
that the balance of the Company’s bank deposit in current account on the same
date was P131,640. Verification revealed that the check issued for P9,260 is not
yet paid by the bank. The corporation sells at 40% above cost.
ACCP302 AC32
Your examination of the available records disclosed the following information:
Capital stock issued at par for cash P1,800,000

Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which there
is still balance unpaid of P30,000 165,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 251,480
Total sales 1,815,750
Total amount still due from customers 446,900
Inventory of merchandise on November 15 at cost 480,600
Expenses paid excluding purchases 303,780

a. Collections from sales
b. Payments for purchases
c. Total cash disbursements
Solutions:
a.
Sales P1,815,750
Less: accounts receivable 446,900
Collections from sales P1,368,850
b.
Cost of sales (P1,815,750/140%) P1,296,964
Add: Merchandise inventory 480,600
Purchases 1,777,564
Less: Accounts payable 251,480
Payments for purchases P1,526,084
c.
Purchase of real estate P1,000,000
Payment for furniture and
fixtures (P165,000 - 135,000
P30,000)
Expenses paid 303,780
Payments for purchases 1,526,084
Total cash disbursements P2,964,864
7. You were engaged to audit the accounts of Rookie Corporation for the year
ended December 31, 2021. In your examination, you determined that the cash
account represents both cash on hand and cash in bank. You further noted that
the company’s internal control over cash is very poor.
ACCP302 AC32
You started the audit on January 15, 2022. Based on your cash count on this
date, cash on hand amounted to P21,500. Examination of the cash book and
other evidence of transactions disclosed the following:
a. January collections per duplicate receipts, P75,700.
b. Total duplicate deposit slips, all dated January, P45,000. This amount
includes a deposit representing collections on December 31.
c. Cash book balance at December 31, 2021 amounted to P195,000,
representing both cash on hand and cash in bank.
d. Bank statement for December showed a balance of P175,400.
e. Outstanding checks at December 31:
November checks December checks

No. 280 P1,800 No. 331 P2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000
f. Undeposited collections at December 31, 2021 amounted to P25,000.
g. An amount of P4,600 representing proceeds of a clean draft on a customer
was credited by bank, but is not yet taken up in the company’s books.
h. Bank service charges for December, P700.
The company cashier presented to you the following reconciliation statement for
December 2021, which he has prepared:
Balance per books, December 31, P195,600

2021
Add outstanding checks:
No. 331 P2,400
339 1,600
345 2,000
353 3,600
364 1,000 10,600
Total 206,200
Bank service charge (700)
Undeposited collections (25,400)
Balance per bank, December 31, P180,100
2021

a. Adjusted cash balance at year-end
b. Cash shortage at year-end
Solution:
Bank Books
Unadjusted balances P175,400 P195,000
Add (deduct) adjustments:
ACCP302 AC32
Outstanding checks: (46,000)

Undeposited collections 25,000
Unrecorded bank collection 4,600
Bank service charge (700)
Balances 154,400 198,900
Shortage (44,500)
Adjusted balances P154,400 P154,400
8. You are making an audit of the Fiend Corporation for the past calendar year. The balance of
the Petty Cash account at December 31, 2021 was P1,500. Your count of the imprest cash count
made at 10:30 am on January 3, 2022, in the presence of the petty cash custodian, revealed:
Currency and coins 621.48
Checks:
Date Maker Bank
12/28/21 Irene, vice-president PNB 380.00
12/29/21 Wendy, employee DBP 50.00
12/31/21 Seulgi, customer RCBC 173.60
01/02/22 Joy, customer PNB 111.96
01/10/22 Yeri, employee PNB 70.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)
Vouchers:
Dec. 11 #261 Kevin, shipping clerk – temporary advance for the use of the
receiving department. Your count
of Mr. Kevin’s fund revealed: currency – P38.80;
merchandise freight bills, P51.20. P 90.00
Dec. 28 # 301 Postage 22.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 78.93
Jan. 2 # 500 Freight bill on merchandise purchases 30.36
IOU Dec. 21 Jeff, employee 56.00
Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice #315 Dec. 30 P 110.00
328 Dec. 31 183.80
334 Jan. 2 121.36
(As a general rule, the petty cashier endeavored to turn over the proceeds of cash
sales to the general cashier on the 10th, 20th and last days of each month. Proceeds on
these sales were recorded and deposited by the general cashier.)
ACCP302 AC32
Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.

a. Petty cash fund shortage at year-end
b. Adjusted petty cash fund balance at year end.
Solutions:
a.
Currency and coins 621.48

Checks 785.56
Vouchers 268.59
IOU 56.00
TCAF 1,731.63
Petty Cash Fund per ledger (1,500.00)

Undeposited sales ( 415.16)
Cash shortage P (183.53)
b.
Petty Cash Fund
Beg. 1,500
183.53
90.00
238.23
56.00
End. P 932.24
9. The following data are gathered from the cash books and bank statement received from Money
Bank by Lalisa Company:
• The cash in bank ledger account shows a debit balance of P309,188.50as of May 31.
• The bank statement shows a credit balance of P320,580 as of May 31.
• An examination of the checks encashed by the bank shows that the following checks are not
presented for payment:
No. 187, P3,608 No. 189, P15,500
No. 191, P4,400 No. 192, P1,600.50
No. 193, P23,000
• A certified check for P22,750 payable to creditor, was encashed by the bank during May.
ACCP302 AC32
• The bank statement shows a deduction of P10,502 for check No. 184. The check was actually
made out at P10,205.
• A check deposited on May 27 for P34,300 was returned by the bank on May 28 marked Refer
to Maker.
• A non-interest bearing note for P45,000 was collected by the bank for the account Lalisa
Company. Collection fee deducted by the bank is P350.
• A deposit for P20,500 was recorded in the books twice.
• Check No. 179 for P26,500 was erroneously recorded in the books as P56,200.
• Interest on an outstanding loan payable, deducted by the bank on May 31, P1,320.
Collections on May 31 to be deposited on June 1, P16,488.

a. Adjusted cash balance at May 31
b. Cash shortage at May 31
Solutions:
a.
Unadjusted Book balance 309,188.50 Unadjusted Bank balance 320,580
Returned check (34,300.00) Outstanding checks (48,108.50)
Collection of Notes 16,488.00 Error 297.00
Error (20,500.00) Deposit in transit 26,488.00
Error 29,700.00
Error ( 1,320.00)
Adjusted book balance 299,256.50 Adjusted bank balance 299,256.50
b.
Cash
34,300
16,488
20,500
29,700
1,320
46,188 56,120
Cash shortage 9,932
10. In connection with your audit, Steppingstone Company presented to you the following
information:
ACCP302 AC32
Steppingstone Company
Comparative Balance Sheets
December 31, 2021 and 2020
2021 2020
Assets
Current Assets:
Cash P 476,000 P 392,000
Available for sale securities 236,000
Accounts Receivable 1,250,000 1,020,000
Inventory 1,120,000 960,000
Prepaid expenses 140,000 84,000
Total Current Assets 3,212,000 2,448,000
Property, plant, and equipment 2,144,000 1,636,000
Accumulated depreciation (304,000) (212,000)
1,840,000 1,424,000
Total Assets P5,062,000 P3,880,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable P 850,000 P 800,000
Accrued expenses 392,000 304,000
Dividends Payable 160,000 -
Total Current Liabilities 1,400,000 1,096,000
Notes Payable - due 2008 500,000 -
Total Liabilities 1,900,000 1,096,000
Stockholders' Equity:
Common Stock 2,400,000 2,200,000
Retained earnings 752,000 576,000
Total Stockholders' Equity 3,152,000 2,776,000
Total Liabilities and Stockholders' Equity P5,054,000 P3,880,000
Steppingstone Company
Condensed Comparative Income Statements
For the Years Ended December 31, 2021 and 2021
2021 2021
Net sales P14,250,000 P13,016,000
Cost of Goods Sold 11,160,000 10,272,000
Gross Profit 3,088,000 2,744,000
Expenses 2,084,000 1,944,000
Net Income P 1,014,000 P 800,000
Additional information for Steppingstone:

(a) All accounts receivable and accounts payable relate to trade merchandise.
(b) The proceeds from the notes payable were used to finance plant expansion.
(c) Capital stock was sold to provide additional working capital.
ACCP302 AC32

a. Cash collected from accounts receivable if all sales are on account
b. Cash payments made on accounts payable to suppliers if all purchases on inventory are on
account
Solutions:
a.
Accounts receivable, 1/1/21 P 1,020,000
Add: Sales for 2021 14,250,000
Total collectible accounts 15,270,000
Less: Accounts receivable, 12/31/21 1,250,000
Cash collected from accounts receivable P14,020,000
b.
Accounts payable, 1/1/21 P 800,000
Add: Purchases for 2021:
Cost of goods sold for 2021 P11,160,000
Add: Inventory, 12/31/21 1,120,000
Total goods available for sale 12,280,000
Less: Inventory, 1/1/21 960,000 11,320,000
Total accounts to be paid 12,120,000
Less: Accounts payable, 12/31/21 850,000
Cash payments made on AP P11,270,000
RECEIVABLES
SUMMARY
AUDIT OBJECTIVES:
- To determine that receivables exist and represent bona fide obligations owed to the
company as of the statement of financial position date.
ACCP302 AC32
- To determine that all transactions relative to receivables have been recorded in the
proper accounting period.
- To determine that receivables are recorded and presented at proper amounts in
accordance with PAS/PFRS
- To determine that receivables are properly presented and classified in the statement of
financial position.
AUDIT PROCEDURES:
- Obtain a schedule of aged trade accounts receivable and notes receivable schedule and
reconcile to ledgers.
- Confirm receivables with debtors.
- Inspect notes on hand.
- Perform analytical procedures to determine whether recorded sales and receivables
balances appear reasonable.
- Test cutoff sales and sales returns to determine whether receivables are recorded in
proper accounting period,
- Review collectability of receivables and determine the adequacy of allowance for
doubtful accounts.
- Recalculate the interest income from the notes receivable.
- Evaluate financial statement presentation and disclosure of receivables.
- Obtain written client representations regarding pledge, discount, or assignment of
receivable, and about receivables from officers, directors, affiliates, or other related parties.
MEASUREMENT
- Receivables measured at fair value with changes in fair value reported in earnings
- Receivables measured at lower of cost or fair value
- Except for credit card receivables, trade accounts receivable that have both of the
following characteristics:
a. They have a contractual maturity of one year or less
b. They arose from the sale of goods or services.
PROBLEMS:
1. Your audit disclosed that on December 31, 2021, the accounts receivable control account of
Miju Company had a balance of P3,150,000. An analysis of the accounts receivable account
showed the following:
Accounts known to be worthless P 40,000
Advance payments to creditors on purchase orders 200,000
Advances to affiliated companies 400,000
Customers’ accounts reporting credit balances
arising from sales return (250,000)
ACCP302 AC32
Interest receivable on bonds 250,000

Other trade accounts receivable – unassigned 800,000
Subscriptions receivable for common stock due in 30 days 700,000
Trade accounts receivable - assigned (Finance
company’s equity in assigned accounts is P150,000) 475,000
Trade installment receivable due 1 – 18 months,
including unearned finance charges of P30,000 430,000
Trade receivables from officers due currently 25,000
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 80,000
P 3,150,000
Determine the adjusted balance of the following:
a. trade accounts receivable as of December 31, 2021
b. current trade and other receivable as of December 31, 2021
Solutions:
a. Other trade accounts receivable – unassigned P 800,000
Trade accounts receivable - assigned 475,000
Trade installment receivable due 1 – 18 months, net of
unearned finance charges of P30,000 400,000
Trade receivables from officers due currently 25,000
Trade accounts on which post-dated checks are held 80,000
Trade accounts receivable P 1,780,000
b. Trade accounts receivable (answer no. 1) P 1,780,000

Advance payments to creditors on purchase orders 200,000
Interest receivable on bonds 250,000
Subscriptions receivable, due in 30 days 700,000
Current trade and other receivables P2,930,000
2. The adjusted trial balance of Flames Company as of December 31, 2020 shows the following:
Debit Credit
Accounts receivable P2,000,000
Allowance for bad debts P60,000
Additional information:
• Cash sales of the company represents 10% of gross sales.
• 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
ACCP302 AC32
• It is expected that cash discount of P15,000 will be taken on accounts receivable outstanding at
December 31, 2021.
• Sales returns in 2021 amounted to P400,000. All returns were from charge sales.
• During 2021, accounts totaling to P45,000 were written off as uncollectible; bad debt
recoveries during the year amounted to P5,000.
• The allowance for bad debts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31, 2021 is
150% of the rate used on December 31, 2020
Determine the balances of the following:

a. The accounts receivable as of December 31, 2021
b. The allowance for doubtful accounts as of December 31, 2021
Solution:
a. Expected cash discounts P 15,000
Divide by percentage of cash discount 2%
Portion of AR that will be granted cash discounts 750,000
Divide by percentage of total AR estimated to take
advantage of the discount 10%
Accounts receivable, end P 7,500,000
b. Accounts receivable, end P 7,500,000

Multiply by bad debt rate (P60,000/P2,000,000) x 150% 6%
Allowance for doubtful accounts, end P 20,250
3. In your audit of Queendom Co., you noted that the company’s balance sheet shows the
accounts receivable balance at December 31, 2020 as follows:
Accounts receivable P4,600,000
Allowance for doubtful accounts 92,000
P4,692,000
During 2021, transactions relating to the accounts were as follows:

• Sales on account, P40,400,000.
• Cash received from collection of current receivable totaled P21,360,000, after discount of
P840,000 were allowed for prompt payment.
• Customers’ accounts of P260,000 were ascertained to be worthless and were written off.
• Bad accounts previously written off prior to 2020 amounting to P30,000 were recovered.
• The company decided to provide P194,000 for doubtful accounts by journal entry at the end of
the year.
• Accounts receivable of P6,000,000 have been pledged to a local bank on a loan of P3,400,000.
Collections of P1,500,000 were made on these receivables (not included in the collections
previously given) and applied as partial payment to the loan.

ACCP302 AC32
a. The accounts receivable as of December 31, 2021

b. The allowance for doubtful accounts as of December 31, 2021
Solutions:
a. Accounts receivable, Dec. 31, 2020 P 4,600,000
Add: Sales on account 40,400,000
Bad debt recoveries 30,000
Total 45,030,000
Less: Current receivables collected, before
cash discounts (P21,360,000 + P840,000) P22,200,000
Accounts written off 260,000
Bad debt recoveries 30,000
Collections made on AR pledged
as collateral 1,500,000 23,990,000
Accounts receivable, Dec. 31, 2021 P 21,040,000
b. Allowance for doubtful accounts, Dec. 31, 2020 P 92,000

Add: Bad debt recoveries 30,000
Provision for doubtful accounts 194,000
Total 316,000
Less: Accounts written off 260,000
Allowance for doubtful accounts, Dec. 31, 2021 P 56,000
4. You were able to obtain the following information from your audit of Lifepoints Corporation’s
Accounts Receivable and Allowance for Doubtful Accounts:
• From the general ledger you noted that the Accounts Receivable has a balance of P958,000 as
of December 31, 2021. Below is a transcript of the Allowance for Doubtful Accounts:
Debit Credit Balance

January 1 – Balance P30,000
July 31 – Write-off P 21,000 9,000
December 31- Provision P 58,000 P 67,000
• The summary of the subsidiary ledger as of December 31, 2021 was totaled as follows:
Debit balances:
Under one month P 380,000
One to six months 358,000
Over six months 172,000
P 910,000
Credit balances:
Irene P 9,000 - Good; additional billing in January, 2021
Wendy 16,000 - Should have been credited to Joy
Yeri 15,000 - Advances on sales contract
ACCP302 AC32
P40,000
The customers’ ledger is not in agreement with the accounts receivable control. The
client requested you to adjust the control account to the subsidiary ledger after corrections are
made.
• It is agreed that 1% is adequate for accounts under one month. Accounts one to six months are
expected to require a reserve of 2%. Accounts over six months are analyzed as follows:
Definitely bad P 46,000
Doubtful (estimated to be 50% collectible) 22,000
Apparently good, but slow (estimated to be 90% collectible) 84,000
Total P 152,000
a. How much is the adjusted balance of Accounts Receivable as of December 31, 2021?
b. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December
31, 2021?
c. How much the Doubtful Accounts expense for the year 2021?
Solutions:
a.
SL
GL Debit Credit 0-1 month 1-6 months Over 6
months
Unadjusted balance 958,000 910,000 40,000 380,000 350,000 172,000
Add: (Deduct)
Account balances 24,000 (16,000) (40,000) (16,000)
with credit balances
Definitely (46,000) (46,000) (46,000)
uncollectible accounts
Unlocated difference (88,000)
Adjusted balance 848,000 848,000 - 380,000 334,000 126,000
b.
Account classification Adjusted balance Rate Required
Allowance
ACCP302 AC32
0 to 1 month P380,000 1% P 3,800

1 to 6 months 334,000 2% 6,680
Over 6 months 126,000 P22,000 – 50% 11,000
P84,000 – 10% 8,400
P29,880
c.
Doubtful account expense, per books P 58,000
Add: adjustment to allowance:
Required allowance P 29,880
Less balance before required
allowance (P67,000 – P58,000) 9,000 20,880
Doubtful Accounts expense for 2021 P 37,120
5. Your audit of Seulzip Corporation for the year ended December 31, 2021 revealed that the
Accounts Receivable account consists of the following:
Trade accounts receivable (current) P 4,440,000
Past due trade accounts 740,000
Uncollectible accounts 148,000
Credit balances in customers’ accounts (60,000)
Notes receivable dishonored 250,000
Consignment shipments – at cost
The consignee sold goods costing P86,000 for P180,000.
A 10% commission was charged by the consignee
and remitted the balance to Seulzip. The cash was received in
January, 2022. 360,000
Total P 5,878,000
The balance of the allowance for doubtful accounts before audit adjustment is a credit of
P90,000. It is estimated that an allowance should be maintained to equal 5% of trade receivables,
net of amount due from the consignee who is bonded. The company has not provided yet for the
2021 bad debt expense.
a. Trade accounts receivable
b. Allowance for doubtful accounts
c. Doubtful account expense
Solutions:
a. Trade receivables (current) P 4,440,000
Past due trade accounts 740,000
Notes receivable dishonored 250,000
Consignment goods already sold (P180,000 x 90%) 162,000
ACCP302 AC32
Adjusted trade receivables P 5,592,000

b. Adjusted trade receivables P 5,592,000
Less: due from consignee 162,000
Basis of allowance for doubtful accounts 5.430,000
Multiply: Bad debt rate 5%
Required allowance for doubtful accounts P 271,500
c. Required allowance for doubtful accounts P271,500

Add: write-off of uncollectible accounts 148,000
Total 419,500
Less: allowance account before adjustment 90,000
Doubtful accounts expense P 329,500
6. In connection with your examination of the financial statements of Aseul, Inc. for the year
ended December 31, 2021, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.
The December 31, 2021 balance in the Accounts Receivable control accounts is P888,000.
The only entries in the Doubtful Accounts Expense account were:
• A credit for P1,296 on December 2, 2021 because Company S remitted in full for the
accounts charged off on October 31, 2021
• A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
The Allowance for Doubtful Accounts schedule is follows:
Debit Credit Balance
January 1, 2021 P15,632
October 31, 2021
Uncollectible accounts:
Company S – P 1,296
Company J – P 3,280
Company Y – P 2,256P5,032 10,600
December 31, 2021 P38,400 P48,000
An aging schedule of the accounts receivable as of December 31, 2021 is presented below:
Age Net debit Amount to which the Allowance
balance is to be adjusted after
adjustments and corrections
ACCP302 AC32
have been made
0 to 1 month P 382,960 1 percent

1 to 3 months 327,280 2 percent
3 to 6 months 78,720 3 percent
Over 6 months 14,000 Definitely uncollectible, P4,000;
P8,000 is considered 50%
uncollectible; the remainder
is
estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account
receivable of P1,000 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2021. The Accounts Receivable
control account is not in agreement with the subsidiary ledger. The difference cannot be located,
and you decided to adjust the control account to the sum of the subsidiaries after corrections are
made.
Determine the adjusted balance of the following:
a. Accounts receivable
b. Allowance for doubtful accounts
Solutions:
a.
GL SL 0-1 month 1-3 3-6 Over 6
months months
Unadjusted balance 888,000 802,960 382,960 327,280 78,720 14,000
Add: (Deduct)
Understatement of (800)
accounts written off
(P5,832-P5,032)
Definitely (4,000) (4,000) (4,000)
uncollectible accounts
Advances from 8,000 8,000 8,000
customers
Accounts w/ credit 1,000 1,000 1,000
balances
Unlocated difference (69,040)
Adjusted balance 815,960 815,960 390,960 328,280 78,720 10,000
b.
Account classification Adjusted balance Rate Required
ACCP302 AC32
Allowance
0 to 1 month P 390,960 1% P 3,909.60
1 to 3 months 328,280 2% 6,565,60
3-6 months 78,720 3% 2,361.60
Over 6 months 10,000 P8,000– 50% 4,000
P2,000 – 20% 400
P17,236.80
7. During your examination of the 2021 financial statements of the Coldplay Company you find
that the company does not provide allowance for doubtful accounts ever since it started
operations in 2017. The company’s practice is to directly write-off as expense doubtful accounts
and credit recoveries to income. The company’s contracts are generally for two years.
Upon your recommendation, the company agreed to change its accounts for 2021 to give effect
to doubtful treatment on the allowance basis. The allowance is to be based on a percentage of
sales which is derived from the experience of prior years. Statistics for 2017 to 2021 are shown
as follows:
Year of Sale 2017 2018 2019 2020 2021
Charge Sales P 3,000,000 P 6,200,000 P 6,900,000 P 7,500,000 P 6,500,000
Accounts
Written off
& Year of Sale
2017 14,000
2018 35,000 22,000
2019 12,000 98,000 31,200
2020 28,800 110,000 46,000
2021 64,800 110,000 33,600
Recoveries &
Year of Sale
2017
2018 2,500
2019 9,500
2020 12,000
2021 13,400
Accounts receivable at December 31, 2021 were as follows:

From 2020 sales P 360,000
From 2021 sales 3,240,000
Total P3,600,000

ACCP302 AC32
a. The average percentage of net doubtful accounts to charge sales that should be used in setting
up the 2021 allowance
b. Doubtful accounts expense for 2021
Solutions:
a.
Year Charge sales AR written-off Recoveries Net AR written-off
2017 P 3,000,000 61,000 2,500 58,500
2018 6,200,000 148,800 9,500 139,300
2019 6,900,000 206,000 12,000 194,000
P 16,100,000 P 415,800 P24,000 P 391,800
Net AR written off P 391,800
Divide by charge sales P16,100,000
Percentage 2.43%
b.
Doubtful accounts expense for 2021 (P6,500,000 x P2.43%) P 157,950
8. The accounts receivable of EIP Company were stated at P1,476,250 in a balance sheet
submitted to a banker for credit. You are called upon to audit the report and upon analysis, the
asset was found to consist of the following items:
Due from customers on open account 1,130,000
Acknowledged claim for damages 23,000
Due from consignee at billed price – cost price
being P23,000 30,000
Investment in and advances to affiliated company 165,000
Loans to officers and employees 12,000
Deposits with municipalities – bids for contracts 63,250
Unpaid capital stock subscriptions 55,000
Advances to creditors for merchandise purchased
but not received 22,000
Cash advanced to salesmen for traveling expenses 4,000
Allowance for doubtful expense (28,000)
P 1,476,250
ACCP302 AC32
The amount of P1,130,000 due from customers was the remaining balance after deducting
accounts with credit balances of P 7,000.
During your examination, you noted that on December 31, the company assigned P350,000 of
customers’ accounts to secure a 17% P230,000 note payable. A 1% commission based on the
accounts was charged and deducted from the cash received. The client recorded this transaction
by a debit to cash and a credit to notes payable.
a. Accounts receivable (gross) balance at December 31
b. Total current non-trade receivable balance at December 31
Solutions:
a. The claims for damages is considered as accounts receivable. Therefore, P23,000 is the gross
balance of accounts receivable
b. The amount due from consignee is qualified to be non-trade receivable and therefore has a
balance of P30,000 recorded at billed price.
9. The following selected transactions occurred during the year ended December 31,
2021 of SMTown Company:
Gross sales (cash and credit) P 950,436.80

Collections from credit customers, net of 2% cash discount 284,000.00
Cash sales 190,000.00
Uncollectible accounts written off 20,200.00
Credit memos issued to credit customers for sales ret./allow. 11,080.00
Cash refunds given to cash customers for sales ret./allow. 15,148.00
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above) 6,555.20
At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The
allowance for bad debts at the beginning of the year is P19,400.20.

a. Bad debts expense at year-end
b. Accounts receivable at year-end
c. Allowance for doubtful accounts at year-end
ACCP302 AC32
Solutions:
a. Bad debts:
Net credit sales 743,356.80
x % of uncollectible 2%
Bad debts 14,867.14
b.
Accounts Receivable
Credit sales 760,436.80 Collection 284,000
Recoveries 6,555.20 Sales discount from 6,000
credit customers
Write off 20,200
Sales returns from 11,080
credit customers
Recoveries 6,555.20
766,992 327,835.20
Ending balance 439,156.80
c. Allowance for bad debts

Beg. Balance 19,400.20
Provision for bad debts 14,867.14
Recoveries 6,555.20
Less: Write-off 20,200
Allowance for doubtful accounts, end. 20,622.54
10. Presented below are unaudited balances of selected accounts of TS Company as of

December 31, 2021:
Selected Accounts Unaudited Balances 12/31/21

Debit Credit
Cash 550,000
Accounts receivable 1,500,000
Net sales 5,750,000
Additional information are as follows:

ACCP302 AC32
a. Goods amounting to P45,000 were invoiced for the accounts of Perfect 10 Store &
Co., recorded on January 2, 2021 with terms of net, 60 days, FOB shipping point.
The goods were shipped to Variety Store on December 30, 2021.
b. The bank returned on December 29, 2021, a customer’s check for P5,500 marked
“DAIF”, but no entry was made.
c. TS Company estimates that allowance for uncollectible accounts should be one and
one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2021.
Determine the adjusted balances of the following:

a. Accounts receivable at year-end
b. Allowance for doubtful accounts at year-end
Solutions:
a. Accounts receivable, beg 1,500,000
Goods invoiced 45,000
DAIF check 5,500
Accounts receivable, end. 1,550,500
b. Accounts receivable, end 1,550,500
Multiply: 1½%
ACCP302 AC32
INVENTORIES
SUMMARY
AUDIT OBJECTIVES:
- To determine whether inventories exists at year-end and represent items held for sale in
the ordinary course of business
- To determine whether all transactions related to inventory are recorded in the proper
accounting period.
- To determine that inventory listings are accurately compiled and inventory quantities
include all items on hand and in transit.
- To determine whether the company has legal title or ownership rights to inventory items
and inventories exclude items billed to customers or owned by others.
- To determine whether the inventories are properly stated with respect to:
a. cost determined by an acceptable method consistently applied.
b. slow-moving, excess, defective, and obsolete items identified and reduced to
replacement cost or net realizable value if lower than cost.
- To determine that the inventories and cost of goods sold are presented and classified in
the financial statements in accordance with PAS/PFRS.
AUDIT PROCEDURES:
- Obtain listings of inventory and reconcile to ledgers.
- Observe the taking of physical inventory and conduct test counts.
- Confirm inventories in public warehouse and with consignees.
- Obtain a final inventory listing from the client
a. trace test counts made during the inventory observation into inventory listing.
b. test the clerical accuracy of the final inventory listing.
- Review the year-end cutoff of purchases and sales transactions
- Test numerical sequence of inventory purchase requisition.
- Review entries to cost of goods sold.
ACCP302 AC32
- Perform analytical review related to inventories and cost of goods sold.

- Make inquiries of management regarding inventory ownership and examine
consignment of agreements.
- Evaluate the bases and methods of inventory pricing.
- Vouch and test inventory pricing.
- Check inventory for quality and/or obsolescence.
- Determine the existence of pledged inventory.
- Evaluate financial statement presentation of inventories and cost of goods sold,
including the adequacy of disclosure.
PAS 2 INVENTORY
Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business (work in
process), and materials and supplies that are consumed in production (raw materials) (PAS 2.6)
However, PAS 2 excludes certain inventories from its scope
• Work in process arising under construction contracts (PAS 11)
• Financial instruments (PAS 39)
• Biological assets related to agricultural activity and agricultural
produce at the point of harvest (PAS 41).
Inventories are required to be stated at the lower of cost and net realizable value (NRV)
(PAS 2.9)
MEASUREMENT OF INVENTORIES
COST SHOULD INCLUDE: (PAS 2.10)
• costs of purchase (including taxes, transport, and handling) net of trade
discounts received
• costs of conversion (including fixed and variable manufacturing overheads)
• other costs incurred in bringing the inventories to their present location and
condition
PAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs
(interest) can be included in cost of inventories that meet the definition of a qualifying asset.
[PAS 2.17 and PAS 23.4]
Inventory cost should not include:
• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of
inventories invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.
ACCP302 AC32
PROBLEMS:
1. The Peek-A-Boo Company is on a calendar year basis. The following data
were found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of
P100,000, had been excluded from the inventory, and further testing
revealed that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and
recorded as a purchase. However, upon your inspection the goods were
found to be defective and would be immediately returned.
c. Materials costing P250,000 and billed on December 30 at a selling price of
P320,000, had been segregated in the warehouse for shipment to a customer.
The materials had been excluded from inventory as a signed purchase order
had been received from the customer. Terms, FOB destination.
d. Goods costing P70,000 was out on consignment with Rookie Company.
Since the monthly statement from Rookie Company listed those materials as
on hand, the items had been excluded from the final inventory and invoiced
on December 31 at P80,000.
e. The sale of P150,000 worth of materials and costing P120,000 had been
shipped FOB point of shipment on December 31. However, this inventory
was found to be included in the final inventory. The sale was properly
recorded in 2020.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but
not shipped at December 31, and were not included in the inventory. A
review of the customer’s purchase order set forth terms as FOB destination.
The sale had not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but the
goods had not arrived as yet. However, these materials costing P170,000 had
been included in the inventory count, but no entry had been made for their
purchase.
h. Merchandise costing P200,000 had been recorded as a purchase but not
included as inventory. Terms of sale are FOB shipping point according to the
supplier’s invoice which had arrived at December 31.
Further inspection of the client’s records revealed the following December 31,
2021 balances:
Inventory P 1,500,000
Accounts receivable P 585,000
Accounts payable P 790,000
Net sale P 5,555,000
Net purchases P 2,450,000
Net income P 810,000

ACCP302 AC32
a. Inventory
b. Accounts payable
c. Net sales
d. Net purchases
e. Net income
Solution:
Account Net Net
s Purchases Income
Inventory Net Sales
Payable
Unadjuste
d
balances P1,500,00 P790,00 P5,555,00 P2,450,00 P810,00
0 0 0 0 0
a. (100,00 (100,000) 100,000
0)
b. (50,000) (50,000) (50,000)
c. 250,000 (320,000) (70,000)
d. 70,000 (80,000) (10,000)
e. (120,000) (120,000
)
f. 100,000 100,000
g. 170,000 170,000 (170,000
)
h. 200,000 200,000
Adjusted
balance
s P1,950,00 P810,00 P5,155,00 P2,470,00 P840,00
0 0 0 0 0
ACCP302 AC32
2. You were engaged by Monster Corporation for the audit of the company’s financial
statements for the year ended December 31, 2021. The company is engaged in the
wholesale business and makes all sales at 25% over cost.
The following were gathered from the client’s accounting records:
SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry
(4,500,000)
12/31 SI No. 971 24,000 P -
12/31 Closing entry
(8,295,000)
P -
*Note: SI = Sales Invoice RR = Receiving Report
Accounts receivable P850,000
Inventory 1,000,000
Accounts payable 500,000
You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 1063 and that no shipments had been made on
any Sales Invoices whose number is larger than No. 968. You also obtained the following
additional information:
a) Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not
received until the following year. Cost was P27,000.
ACCP302 AC32
b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on
Receiving Report No. 1063. The freight was paid by the vendor.
 Truck No. MGM 357 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute
to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice
No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of
P2,000 was paid by the client. However, the freight was deducted from the purchase price of
P800,000.

a. Sales at year-end
b. Purchases at year-end
c. Accounts receivable at year-end
d. Inventory at year-end
e. Accounts payable at year-end
Solution:
Sales Purchases AR Inventory AP

Unadjuste
d
balances P8,295,00 P4,500,00 P850,00 P1,000,00 P500,00
0 0 0 0 0
AJE No. 1 (195,000) (195,000
)
AJE No. 2 27,000 27,000
AJE No. 3 96,000
AJE No. 4 120,000
AJE No. 5 (225,000) (225,000
)
AJE No. 6 180,000
Adjusted
balance
s P7,875,00 P4,527,00 P430,00 P1,396,00 P527,00
0 0 0 0 0
ACCP302 AC32
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000) P195,000

To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases P27,000
Accounts payable P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory P96,000
Cost of sales P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25) P120,000

To take up unshipped goods under SI No. 968
5) Sales P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) P180,000

To take up goods under SI No. 966
3. Milky Way Company engaged you to examine its books and records for the fiscal year ended
June 30, 2021. The company’s accountant has furnished you not only the copy of trial balance
as of June 30, 2021 but also the copy of company’s balance sheet and income statement as at
said date. The following data appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2020 P 800,000
Add: Purchases 3,800,000
Less: Inventory, June 30, 2021 500,000
Cost of goods sold P 4,100,000
The beginning and ending inventories of the year were ascertained thru physical count except
that no reconciling items were considered. Even though the books have been closed, your
working paper trial balance show all account with activity during the year. All purchases are
FOB shipping point. The company is on a periodic inventory basis.
ACCP302 AC32
In your examination of inventory cut-offs at the beginning and end of the year, you took note of
the following:
July 1, 2020
a. June invoices totaling to P130,000 were entered in the voucher register in June. The
corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received
during June.
June 30, 2021
c. Invoices with an aggregate value of P186,000 were entered in the voucher register in July,
and the goods were received in July. The invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in June but the goods
were not received until July.
e. Invoices totaling P108,000 (the corresponding goods for which were received in June) were
entered the voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June 30 and the goods
delivered at that time. Book entries relating to the sales were made in June.

a. Adjusted inventory as of July 1, 2020
b. Adjusted purchases at June 30, 2021
c. Adjusted inventory as of June 30, 2021
Solution:
Inventory Inventory
7/1/20 Purchases 6/30/21
Unadjusted balances P 800,000 P 3,800,000 P 500,000
Add (deduct) adj.:
a. 130,000
b. (54,000)
c. 186,000 186,000
d. 74,000
e.
f. 108,000
Net adjustments 130,000 240,000 260,000
Adjusted balances P 930,000 P 4,040,000 P 760,000
4. You obtained the following information in connection with your audit of KAI Corporation:
Cost Retail
ACCP302 AC32
Beginning inventory P 2,000,200 P 2,560,000

Sales 7,820,000
Purchases 4,690,650 6,530,000
Freight in 94,550
Mark ups 720,000
Mark up cancellations 120,000
Markdown 240,000
Markdown cancellations 40,000
KAI Corporation uses the retail inventory method in estimating the values of its inventories and
costs.

a. Cost ratio to be used
b. Estimated ending inventory at retail
c. Estimated ending inventory at cost
Solutions:
a.
Cost Retail
Beginning inventory P 2,000,200 P2, 560,000
Purchases 4,690,640 6,530,000
Freight in 94,550
Net mark up (P720,000 - P120,000) 720,000
Net mark down (P240,000 - ___________ 120,000
P40,000)
Goods available for sale P6,785,390 P9,930,000
Cost ratio (P6,785,390/P9,930,000) 68.3

3%
PAS 2 par. 22 states that the retail inventory method is often used in the retail industry for
measuring inventories of large numbers of rapidly changing items with similar margins for
which it is impracticable to use other costing methods. The cost of inventory is determined
by reducing the sales value of the inventory by the appropriate percentage gross margin. The
percentage used takes into consideration inventory that has been marked down to
below its original selling price. An average percentage for each retail department is often
used.
Previously, the conventional approach (lower of average cost or market valuation) is often
used if the problem is silent. The conventional approach ignores markdown in the
computation of cost ratio. However, since PAS 2 specifically states that the percentage
ACCP302 AC32
should take into consideration inventory that has been marked down to below its original
selling price, the cost ratio was computed using the average method.
b.
Goods available for sale at retail P 9,930,000
Less: Sales 7,820,000
Ending inventory, at retail P 2,110,000
c. Ending inventory, at retail P 2,110,000

Multiply by cost ratio 68.33%
Ending inventory, at cost P 1,441,763
5. The CBX Company values its inventory at the lower of FIFO cost or net realizable value
(NRV). The inventory accounts at December 31, 2020, had the following balances.
Raw materials P 850,000
Work in process 1,500,000
Finished goods 1,750,000
The following are some of the transactions that affected the inventory of the CBX Company
during 2021.
Jan. 10 CBX purchased raw materials with a list price of P300,000 and was
given a trade discount of 20% and 10%; terms 2/15, n/30. CBX values
inventory at the net invoice price
Feb. 14 CBX repossessed an inventory item from a customer who was overdue in
making payment. The unpaid balance on the sale is P15,200. The
repossessed merchandise is to be refinished and placed on sale. It is
expected that the item can be sold for P25,000 after estimated refinishing
costs of P6,800. The normal profit for this item is considered to be
P3,400.
Mar. 1 Refinishing costs of P6,500 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P25,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of
P59,200 and a cost P38,400. A reduction of P8,000 off the list price was
granted as a trade-in allowance. The trade-in item is to be priced to sell
at P6,400 as is. The normal profit on this type of inventory is 25% of the
sales price.
ACCP302 AC32

a. Debit to Raw Materials Inventory at January 10
b. Repossessed Inventory at February 14
Solutions:
a. Raw Materials Inventory (P 300,000 x 80% x 90% x 98%) P 211,680
b.
Estimated selling price P25,000
Less: Refinishing costs 6,500
Net realizable value 18,500
Less: Normal profit 3,400
Repossessed inventory P15,100
Repossessed inventory is valued at fair value or best possible approximation of fair value.
Since fair value of the item is not given, the item was valued at net realizable value less the
normal profit. Incidentally, this is the valuation of trade-in inventory.
6. Poppy Manufacturing Company started operations in 2021. Poppy manufactures bath towels.
60% of the production are “Class X” which sell for P500 per dozen and 40% are “Class Y”
which sell for P250 per dozen. During 2021, 6,000 dozens were produced at an average cost of
P350 per dozen. The inventory at the end of the year was as follows:
220 dozens “Class X” @ P350 P 77,000

300 dozens “Class Y” @ P350 105,000
P182,000

a. Total cost allocated to Class X
b. Total cost allocated to Class Y
Solution:
Total cost of production (6,000 dozens x P350) P 2,100,000
a. Class A (P 2,100,000 x 18/24) P 1,575,000
b. Class B (P 2,100,000 x 6/24) P 525,000

ACCP302 AC32
7. The Back to Black Merchandising Company is a leading distributor of kitchen wares. The
company uses the FIFO of calculating the cost of goods sold. The following information
concerning two of the company’s products is taken from the month of May:
PANS KETTLES
No. of Unit No. of Unit cost
units cost units
May 1, beginning inventory 10,000 P 60 6,000 P 40
Purchases:
May 15 14,000 75 9,000 P 45
May 25 6,000 85
Sales for the month 20,000 10,000

(@ P80) (@ P44)
On May 31, Back to Black’s suppliers reduced their price from the last purchase price by the
following percentages:
Pans…………………..25% Kettles…………………20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Back to Black Merchandising Company’s selling costs are calculated at 10% of selling price.
Both products have a normal profit of 30% on sales prices (after selling costs).

a. Total cost of pans as of May 31
b. Total cost of kettles as of May 31
Solutions:
a.
4,000 units @ P75 P 300,000
6,000 units @ P85 510,000
Total cost of Pans P 810,000
b.
Total cost of Kettles (5,000 units @ P45) P 225,000
8. On March 31, 2021 Lucky Company had a fire which completely destroyed the factory
building and inventory of goods in process; some of the equipment was saved.
ACCP302 AC32
After the fire, a physical inventory was taken. The material was valued at P780,000 and the
finished goods at P620,000.
The inventories on January 1, 2021 consisted of:
Materials P 350,000
Goods in process 1,200,000
Finished goods 1,700,000
Total P3,225,000
A review of the accounting records disclosed that the sales and gross profit on sales for the last
three years were:
Sales Gross profit
2018 P8,000,000 P2,500,000
2019 7,600,000 2,250,000
2020 5,000,000 1,780,000
The sales for the first three months of 2021 were P3,000,000. Material purchases were
P1,270,000, transportation on purchases was P100,000 and direct labor cost for the three months
was P1,000,000. For the past two years, factory overhead cost has been 80% of direct labor cost.
a. Gross profit rate
b. Total cost of goods placed in process
Solutions:
a.
2018 2019 2020
Gross profit P2,500,000 P2,250,000 P1,780,000
Divide by Sales P8,000,000 P7,600,000 P5,000,000
Gross profit rate 31.25% 29.61% 35.60%
Average gross profit rate 32.15%
b.
Raw materials, 1/1/21 P 350,000
Purchases 1,270,000
Freight-in 100,000
Raw materials available for use 1,720,000
Raw materials, 3/31/21 (780,000)
Raw materials used 940,000
Direct labor 1,000,000
Factory overhead (P1,000,000 x 80%) 800,000
Total manufacturing cost 2,740,000
Work-in-process, 1/1/21 1,200,000
Total cost placed in process P 3,940,000
ACCP302 AC32
9. In conducting your audit of G7 Corporation, a company engaged in import and wholesale

business, for the fiscal year ended June 30, 2021, you determined that its internal control system
was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2021
instead of at June 30, 2021.
You obtained the following information from the company’s general ledger.
Sales for eleven months ended May 31, 2021 P1,350,000
Sales for the fiscal year ended June 30, 2021 1,570,000
Purchases for eleven months ended May 31, 2021
(before audit adjustments) 1,100,000
Purchases for the fiscal year ended June 30, 2021 1,280,000
Inventory, July 1, 2020 150,000
Physical inventory, May 31, 2021 240,000
Your audit disclosed the following additional information.

1. Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.
2. Deposit of P4,000 made with vendor and charged to purchases in April 2021. Product was
shipped in July 2021.
3. A shipment in June was damaged through the carelessness of the receiving department. This
shipment was later sold in June at its cost of P16,000.

a. Gross profit rate at May 31,2021
b. Cost of goods sold during the month of June 2021
c. Inventory at June 30,2021
Solutions:
a.
Sales for 11 months
ended 5/31/21 P1,350,000
Less cost of sales for 11
months ended 5/31/21:
Inventory, July 1, 2020 P 150,000
Add adjusted purchases:
Unadjusted P1,100,000
Item no. 1 12,000
Item no. 2 (4,000) 1,108,000
Goods available for sale 1,258,000
Less inventory, 5/31/21 240,000 1,018,000
ACCP302 AC32
Gross profit 332,000

Divide by sales for 11 months
ended 5/31/21 1,350,000
Gross profit rate for 11
months ended 5/31/21 24.59
%
b.
Sales for the fiscal year ended June 30, 2021 P 1,570,000
Less: Sales for 11 months ended May 31, 2021 1,350,000
Sales for June, 2021 220,000
Less: Sales without profit 16,000
Sales with profit 204,000
Multiply by: Cost ratio (100% - 24.59%) 75.41%
Cost of sales with profit 153,836.40
Add: Cost of sales without profit 16,000
Total cost of sales for June, 2021 P 169,836.40
c.
Inventory, 7/1/20 P 150,000
Add: Adjusted purchases:
Unadjusted P1,280,000
Item no. 2 (4,000) 1,276,000
Less: Cost of sales:
Sales without profit 16,000
Sales with profit
[(P1,570,000 - P16,000) x 75.41%] 1,171,871.40 1,187,871.40
Inventory, 6/30/21 P 238,128.60
10. During your audit of the records of the SHNTDPE Corporation for the year ended December
31, 2021, the following facts were disclosed:
Raw materials inventory, 1/1/2021 P 720,500

Raw materials purchases 5,300,800
Direct labor 4,850,000
Manufacturing overhead applied (150% of direct 7,350,000
labor)
Finished goods inventory, 1/1/2021 1,240,000
Selling expenses 8,115,800
Administrative expenses 7,380,200
ACCP302 AC32
Your examination disclosed the following additional information:
a) Purchases of raw materials
Month Units Unit Price Amount

January – February 55,000 P17.76 P 976,800
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800
b) Data with respect to quantities are as follows:

Units
Explanation 1/1/21 12/31/21
Raw materials 35,000 ?
Work in process (80% 25,000
completed)
Finished goods 15,000 40,000
Sales, 200,000 units
c) Raw materials are issued at the beginning of the manufacturing process. During the year, no
returns, spoilage, or wastage occurred. Each unit of finished goods contains one unit of raw
materials.
d) Inventories are stated at cost as follows:
 Raw materials – according to the FIFO method
 Direct labor – at an average rate determined by correlating total direct labor cost with
effective production during the period
 Manufacturing overhead – at an applied rate of 150% of direct labor cost

a. Raw Materials Inventory at year-end
b. Finished Goods Inventory at year-end
Solutions:
a.
Raw materials, 1/1/21 45,000
Add Purchases 275,000
Raw materials available for use 320,000
Less: Raw materials, 12/31/21 (squeeze) 70,000
Goods placed in process 250,000
ACCP302 AC32
Less: Work-in-process, 12/31/21 25,000

Goods manufactured 225,000
Finished goods, 1/1/21 25,000
Total goods available for sale 250,000
Less: Finished goods, 12/31/21 50,000
Goods sold 200,000
Raw materials, 12/31/06 (70,000 units x P 1,456,000

P20.80)
b.
Raw materials [(30,000 units x P20.40) +(10,000
units x P20)] P 812,000
Direct labor (40,000 units x P19.80*) 792,000
Factory overhead (40,000 units x P30**) 1,200,000
Finished goods inventory, 12/31/21 P 2,804,000
Labor unit cost (P4,850,000/245,000* units) P19.80*
Overhead unit cost (P7,350,000/245,000* units) P30**
INVESTMENTS
SUMMARY
AUDIT OBJECTIVES:
- To determine that investments in securities (shares, bonds, notes) physically exist and in
loans and advances exist.
- To determine that investments are all included in the statement of financial position.
- To determine that the company owns or has ownership rights to all investments
included in the statement of financial position.
- To determine that investments are valued properly in accordance with generally
accepted accounting principles.
- Investments are properly described and classified in the statement of financial position
and related disclosures are adequate.
AUDIT PROCEDURES:
- Obtain or prepare a listing of securities and investments owned by the company and
related revenue accounts and reconcile to the general ledger.
- Inspect securities on hand.
- Obtain confirmation of securities held by others.
- Vouch selected purchases and sales transactions of securities during the year,
- Verify the client’s cutoff of securities transactions.
- Perform analytical procedures.
- Compute independently revenue from securities.
- Determine market value of securities at statement of financial position date.
- Evaluate the method of accounting for securities.
ACCP302 AC32
- Evaluate financial statements presentation and related revenue or loss accounts.

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Tabunggao, Shane Josa Marie M.

AUDIT OF CASH AND CASH EQUVALENTS

CASH ITEMS INCLUDED IN CASH

part of cash management

• Cash in money market account – cash and cash equivalent

Cash on hand includes the following items:

Determine the following:

d. Cash on hand P 650,000

d. Outstanding checks totaled P98,850 as of December 31.

Determine the following:

Balance per books, 12/31/21 P 737,270

b. Unadjusted balance per books, 12/31/21 P 737,270

Total charges, including an NSF check of P10,000 and

b. Total deposits per bank statement P 120,000

c. Total charges per bank statement P 98,000

d. Balance per books, Nov. 30, 2021 P 226,000

Determine the following:

*117,617 + 220,373 – 97,082

Determine the following:

Less: Deposits credited by the bank in December:

Your examination of the available records disclosed the following information:

Capital stock issued at par for cash P1,800,000

Determine the following:

November checks December checks

Balance per books, December 31, P195,600

Determine the following:

Outstanding checks: (46,000)

Currency and coins 621.48

IOU Dec. 21 Jeff, employee 56.00

Determine the following:

Currency and coins 621.48

Petty Cash Fund per ledger (1,500.00)

Determine the following:

Additional information for Steppingstone:

Determine the following:

Interest receivable on bonds 250,000

b. Trade accounts receivable (answer no. 1) P 1,780,000

Determine the balances of the following:

b. Accounts receivable, end P 7,500,000

During 2021, transactions relating to the accounts were as follows:

Determine the balances of the following:

a. The accounts receivable as of December 31, 2021

b. Allowance for doubtful accounts, Dec. 31, 2020 P 92,000

Debit Credit Balance

0 to 1 month P380,000 1% P 3,800

Adjusted trade receivables P 5,592,000

c. Required allowance for doubtful accounts P271,500

have been made

0 to 1 month P 382,960 1 percent

estimated to be 80% collectible.

Accounts receivable at December 31, 2021 were as follows:

Determine the following:

Gross sales (cash and credit) P 950,436.80

Determine the balances of the following:

c. Allowance for bad debts

10. Presented below are unaudited balances of selected accounts of TS Company as of

Selected Accounts Unaudited Balances 12/31/21

Additional information are as follows:

Determine the adjusted balances of the following:

- Perform analytical review related to inventories and cost of goods sold.

Determine the following:

Determine the following:

Sales Purchases AR Inventory AP

1) Sales (P69,000+P102,000+P24,000) P195,000