‘Auditing Problems SETA INSTRUCTIONS: Select the best answer for each of the following questions. ALL questions are compulsory and MUST be attempted. Mark only one answer for each item on the answer sheet provided. Strictly NO ERASURES ALLOWED. Erasures willsrender your examination answer sheet INVALID, Use PENCIL NO. 2 only. GOODLUCK!@ PROBLEM NO, 10!" > aad During your audit of the records of the Indiana Corporation for the year ended December 31, 2014, the following facts were disclosed: Raw materials inventory, 1/1/2014 720,200 - Raw materials purchases- 5,232,800 © Direct labor * 6,300,000 Manufacturing overhead applied (150%tof direct labor) + 279,450,000 Finished goods inventory, 1/1/2014 Selling expenses Administrative expenses Your examination disclosed the following addition: a) Purchases of raw materials, Month s Unit Price Amount January - February $5,000 P17.76 976,800 March ~ Apr 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 9,232,800 Audling Problems _ sera APIITEMND b) Data with respect to quantities are as follows: Explanat naa ews Raw materials 35,000 ? Work in process (80% completed) oO 25,000 Finished goods 15,000 40,000 Sales, 205,000 units ) 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 Questions: Based on the above and the result of your audit, answer the following: 1, The raw materials inventory as of December 31, 2014 is a. P1,976,000 c. P936,000 b. P1,352,000 4. P897,800 ‘The work in process inventory as of December 31, 2014 is a. Pi,780,000 c. P1,885,565 b. P1,751,294 d. P1,776,000 3. The finished goods inventory as of December 31, 2014 is a. P3,352,000 ¢. P3,553,130 b. P3,334,000 d. P3,284,588 Pape TAA aac BR bpentinPBETT by)SETA 4. The.cost of goods sold for the-year ‘ended December 31, 2014 is a. P16,897,000 ¢. P15,857,000 b. P16 ;568,304 @.- P16,875,000 5. When testing the valuation assertion, the auditor would most likely a. Observe the taking of physical inventory. b, Examine receiving reports for inventory, tracing their recorded amounts. © Perform price tests to the related cost flow assumption. 4. Confirm inventory on consignment. PROBLEM NO. 2 The general ledger trial balance of Miami Corporation includes the foltowing balance sheet accounts at December 31, 2014: Cash 1,056,000 Accounts receivable 1,220,000 Inventory 441,000 Trading securities 200,000 Available for sale investments 500,000 Prepaid insurance 50,000 Deferred tax asset 150,000 Bank overdraft 100,000 Additional information: Cash + The sales book wasdeft open-up to January 5, 2015, and cash sales totaling P150,000 were considered as sales in December. = Checks of P93,000 .in payment of liabilities were .prepared before December 31, 2014, recorded in the books, but not mailed or delivered to payees. ———-— ve + Post-dated checks totaling[ P78,000are being held by the Cashier as part of Cash. The Tompany’s experience shows post-dated checks are eventually realized. Pea to Sas an opeaiP ase np - 190,779 7 {use 4 | | | Auditing Problems aera + Customer's check fof 35900 Hepostea with but returned by Bank, "NSF* on er 27, 2014. Return was recorded in the books, * The Cash account includes P400,000 of compensating balance against a short-term bank loan. The compensating balance is legally restricted as to withdrawal. Accounts receivable The accounts receivable consists of the following: ‘Trade accounts receivable P 650,000 Allowance for uncollectible accounts (20,000) Claim against shipper for goods lost in transit 30,000 ling price of unsold goods sent by Miami on consignment at 130% of cost (included in 's ending inventory at cost) 260,000 it on lease of warehouse used for ‘storing some inventories 300,000 ~* Total 241.220.9000 Inventory A physical count of inventory at December 31, 2014 revealed that Miami had inventory on hand at that date with a cost of . 340,000 ‘.) ee 61 000 2,485,000 W? 92,436,800 6. 2,513,800 PROBLEM NO. 3 Among the account halances of Toronto Corporation at December 33, 2013 are the following Patent, net Installment contract recewable ‘Audeng Probiome, seta Relevant transactions and other information for 2014 were as follows: a) The patent was purchased for P3,150,000 on September 1, 2010. On that date, the remaining legal life was fifteen years, which was also determined to be the u fe. i b) The installment contract receivable represents the balance of the consideration received from the sale of a factory Raptors Company on March 31, 2012, for P12,000,000. Raptors made a P3,000,000 down payment and signed a five- 3% note for the P9,000,000 balance. The first of equal .000 at December 31, 2014. The 2014 payment was received on tune. ©) On January 2, 2034, Toronto purchased a trademark for 2,509,000. Toronto considers the life of the trademark to be wndefunite. 0) On May 1, 2014, Toronto sold the patent in exchange for a 5,000,000 non-interest bearing note due on May 1, 2017. Y ished exchange price for the pat the note had no reagy market. The prevailing rate of interest for a note of ths type at May 1, 2014 was 14%. The present value of 1 for three penods at 14% 15 0.675. The collection of the note recewable is reasonably assured, ©) On duly 1, 2014, Toronto paid 18,800,000 for 759,000 ordinary shares of Canada Corporation, which repre 25% stment in) ‘The fair value of all of Cay le assets net of liabilities equals their carrying amount 10,000. The market price of Canada’s ordinary share ber 31, 2014 was P26,00 per share. Ween Fen a ee‘Auditing Problems SETA f) Canada reported net income and pald dividends of Dividends Net.income per share Six months ended 6/30/14 P5,760,000 None Six months ended 12/31/14 7,040,000 ~—P2.00 Dividend was paid on November 30, 2014. QUESTIONS: Based on the above and the result of your audit, compute for the following: 11. Gain on sale of patent a. P2,620,000 c. P 925,000 (8) P 995,000 dg. P1,078,125 tal interest income for 2014 a) P 760,500 ¢. P1,233,000 b. P1,251,000 d. 1,075,500 13. Noncurrent portion of the installment contract receivable as of ecember 31, 2014 (a.) P5,400,000 c. P1,800,000 - P3,600,000 d, P7,200,000 14, Carrying amount of the note receivable from sale of patent as of December 31, 2014 a. P5,000,000 ¢. P3,375,000 ©@ 3,690,000 d. P3,847,500 15. The carrying amount of the investment in Canada Corporation as of December 31, 2014 a. P18,800,000 b. 19,025,000 P19,060,000 @ 19,500,000 & U3") ‘Auditing Problems PROBLEM NO. 4 In connection with your reconstruction engagement, the Chicago Company presented to you the following information regarding its Cash in Bank account for the month of December 2014: a) Balances per bank statements: November 30, P107,800, and December 31, P115,200. b) Total charges in the bank statement during December were P1,094,850. ) Receipt on December 15 paid out in cash for expenses, .P6,050, Recorded as feceiots,and disbursements per books. 4) Undeposited receipts were: November 30, P45,300 and December 31, P50,600. ) Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a check for P2,500 was certified by the bank on December 26. )_NSF checks returned, recorded as reduction of cash receipts, were: + Returned by bank on December, recorded also in December, P5,200, ~ + Returned by bank on December but recorded in Januery, 3007 9) Collections by bank not recorded by Company were P60,750 in November and P58,200 in December. hh) Bank service charges not entered in company's books were: November 30, P3,750 and December 31, P2,100. i) A check for P4,750 of Chacigo Company was charged to Chicago Company in error. 3) A check drawn for P4,200 was erroneously entered in the books as 2,400. inPBE.4 Bega e ot 2 ‘vomiuanrtecom ob = ‘AP OpenFiiPB5. Pape DorAuditing Problems SETA QUESTIONS: Based on the above and the Based on thn result of your engagement, answer 16. How much is the unadjusted Hote mich I6the anaes cash balance per books as of P196,725 a c. P139,725 & P204,225 *«d. P 82,725 17, How much is the unad; a. P1,098,850 b. P1,110,950 18. How much is December? - a. P1,080,275 b. P1,089,925 ijusted book receipts for December? c. P1,113,600 4: P1,116,150 > the unadjusted book disbursements for c._ P1,068,175 (au, P1,083,875. 12; non much is the unadjusted cash balance as of December 31 14? ui a. P103,900 ¢. P109,800 Hb. 113,400 (4) °163,400 20. How does the auditor typically test for the existence of cash? a. Counting cash at the depository institution Inquiry of management ‘Standard bank confirmation Tracing the bank reconciliation to the general ledger Page Tot AP. OpeaFinPaS. 18 Auditing Problems SETA PROBLEM NO. 5 ‘On January 4, 2014, Brooklyn Corp. paid P1,296,000 for 40,000 ordinary shares of Nets Company. The investment represents a (30% Jnterest in the net assets of Nets and gave Brooklyn the ‘abimtyto exercise significant influence of Nets’ operating and financial policy decisions. Brooklyn received dividends share on December 4, 2014, and Nets reported net 640,000 for the year ended December 31, 2014. The market value of Nets’ ordinary share at December 31, 2014, was P32 per share. The book value of Nets’ net assets was P3,200,000 and: + The fair value of Nets’ depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by 320,000. ‘= The remainder of the excess of the cost of the investment over the book value of assets purchased was attnbutable to goodwill Questions: 21. What amount of the investment cost is attributable to goodwil (2. P240,000 | & 336,000 b. P 96,000 d. P144,000 22. What amount of investment income should be reported in Brooklyn income statement for the year ended December 31, 2014? i a. P120,000 <, P180,000 b. P1@8,000 : d. 192,000 23. What is the carrying amount of the investment in Nets ordinary shares on December 31, 2014? a. P1,280,000 c. P1,296,000 b. P1,356,000 y Page 11 of weowortecomah APOpenrinb asia‘Auditing Problems ier, A 24, Assume that the 40,000 shares represent 10% int net assets of Nets rather than 2 30% interest. What annt'® of investment income should be reported in Brooklyn iment tetement for the year ended December 31, 2014? ene 8 120,000 ¢. P 60,000 / P 64,000 4. 180,000 25. Assume that the 40,000 shares represent 10% interest in the net assets of Nets rather than a 30% interest, What ic the carrying amount of the investment in Nets ordina: share December 31, 20147 eset a. P1,296,000 S P1,280,000 b. P1,356,000 P1,236,000 PROBLEM NO. 6 San Antonio Ltd is asset rich but cash poor. In an attempt to leviate its liquidity problems, it entered into an agreement on 1 July 2013 to sell its processing plant to Spurs Ltd P467,100. At the date of sale, the plant had a carrying amount of P400,000 and a future useful life of five years. Spurs Ltd immediately leased the processing plant back to San Antonio Ltd. The terms of the lease agreement were: Lease term 3 years Economic life of plant 5 years Annual rental payment, in arrears (commencing 30 June 2014) P165;000 Residual value of plant at end of lease term 30,000 Residual value guaranteed by San Antonio Ltd 60,000 Interest rate implicit in the lease z The lease is cancellable, but only with the permission of the fessor. At the end of the lease term, the plant is to be returned to Spurs Ltd. In setting up the lease agreement Spurs ug incurred P9,414 in legal fees and stamp duty costs. The annual rental payment includes P15,000 to reimburse the lessor for maintenance costs incurred on’ behalf of the lessee. Foge T2 TB ‘Auditing Problems SETA QUESTIONS: Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places) 26. The interest rate implicit in the lease is a. 6% c 8% b. 7% d. 9% 27. The interest income to be recognized by the lessor during the fiscal period ended 30 June 2014 is a. 28,591 cc. P27,644 b. P27,080 4. P28,026 28. The carrying amount of the finance lease receivable to be reported by the lessor as of 30 June 2014 is a. P338,384 ¢. P355,105 b. P328,406 4. P345,126 29. The total lease-related expenses to be recognized by the lessee during the fiscal period ended 30 June 2014 is, a. 172,522 c. PL57,522 b. P162,522 4. 120,345 30.The amount to be reported by the lessee under current ies as liability under finance lease as of 30 June 2014 is a. P122,920 c. P128,694 b. P198,110 4. P130,296 PROBLEM NO. 7 In connection with your audit of the Oklahoma Company, you were asked to prepare comparative data from the company's inception to the present. The following were gathered during your audit: oe a ee‘Autiting Problems SETA a. Oklahoma Company's charter became effective 2010, when 80,000, P10 par value, 40,000, 5% cumulative, nonparticipating, preference shares were issued. The ordinary share was sold at P12 per share and the preference share was sold at its par value of P100 per share. ‘on January 2, ordinary shares and b. Oklahoma was unable to pay preference dividends at the end of its first year. The owners of the preference shares agreed to accept 2 ordinary shares for every 50 shares of preference ‘shares owned in discharge of the preference share dividends due on December 31, 2010. The shares were issued on January 2, 2011. The fair value was P30 per share for ordinary ‘on the date of issue. ji hunder ¢, Oklahoma Company acquired all outstanding shares of TI Corporation on May 1, 2012, in exchange for 40,000 ordinary shares of Oklahoma. 4. Oklahoma split its ordinary shares 3 for 2 on January 1, 2013, and 2 for 1 on January 1, 2014. ©- Oklahoma offered to convert 20% of the preference shares to ordinary on the basis of 2 ordinary shares for 1 preference share, The offer was accepted, and the conversion on July 1, 2014. until f. No cash dividends were declared on ordinary shares wil December 31, 2012. Cash dividends per ordinary declared and paid as follows: December 31 June 30 2012 4.00 7 2013 5.00 3.00 2014 P2.00 P2.50 QUESTIONS: i jine the Based on the above and the result of your audit, determine following: i Roe i | | | Auditing Problems SETA 31, Outstanding number of ordinary shares as of December 31, 2014 a. 364,800 ¢. 372,800 b, 684,800 >) 380,800 32. Outstanding number of preference shares as of December 31, 2014 a. 40,000 32,000 b. 24,000 96,000 33. Amount of cash dividends di shareholders for the year 2013, a. P972,800 leclared and paid to ordinary 1,459,200 fr P1,981,440 34-Amount of cash dividends declared and. paid to ordinary shareholders for the year 2014 © P1,713,600 4. P1,673,600 35. Where no independent stock transfer agent are employed and the corporation issues its own stocks and maintains stock records, cancelled stock certificates should a. Be destroyed to prevent reissuance. 2. Be defaced and sent to the secretary of state. C:) Be defaced to prevent reissuance and attached to their ~~ corresponding stubs. 4. Not be defaced but segregated from other stock Certificates and retained in a canceled certificates file. PROBLEM NO. 8 tos Angeles, Inc., is a public enterprise whose shares are traded i the over-the-counter market. “At December 31, 2013, Los Angeles had 6,000,000 authorized shares of P10 par value ordinary shares, of which 2,000,000 shares were issued and Sytstanding. The shareholders’ equity accounts at December 31, 2013, had the following balances, mie RRR earsAxditing Problams SETA Ordinary shares 20,000,000 ‘Share premium 7,500,000 Retained earnings 6,470,000 Transactions during 2014 and other infor rmation rel shareholders’ equity accounts were as follows: "2 € the 1. On January 5, 2014, Los Angeles issued at P54 per shar 100,000 shares of P50 par value, 9% cumulative Converaere preference shares. Each share of preference is convertible, at the option of the holder, into two ordinary shares. Los Angeles had 600,000 authorized preference shares, 2. On February 1, 2014, Los Angeles reacquired 20,000 of its ordinary shares for P16 per share. Los Angeles uses the cost method to account for treasury shares. 3. On April 30, 2014, Los Angeles sold 500,000 shares (previously unissued) of P10 par value ordinary shares to the Public at P17 per share. 4, On June 18, 2014, Los Angeles declared a cash dividend of P1 per ordinary share, payable on July 12, 2014, to shareholders of record on July 1,2014. 5. On November 10, 2014, Los Angeles sold 10,000 treasury shares for P21 per share. 6. On December 14, 2014, Los Angeles declared the yearly cash dividend on preference shares, payable on January 14, 2015, to shareholders of record on December 31, 2014. 7. On January 20, 2015, before the books were closed for 2014, Los Angeles became aware that the ending inventories at December 31, 2013, were understated by P300,000 (the after-tax effect on 2014 net income was P210,000). The appropriate correcting entry was recorded the same day. 8. After correcting the beginning inventory, net income for 2014 was P4,500,000. iit pe aa 2 ‘AP OpentinPBSA4 | | ‘Auditing Problems SETA Questions: 36. The Retained Earnings balance as of January 1, 2014 is a. 6,680,000 . P6,770,000 b. 6,260,000 4. P6,170,000 37. The Retained Earnings balance as of December 31, 2014 Is a. P8,520,000 c. P7,830,000 b. 8,340,000 d. 8,250,000 38, The share premium from preference shares as of December 31, 2014 is (By, P400,000 . P350,000 \e: P100,000 4. P300,000 39. The share premium from ordinary shares as of December 31, old is ‘2. P11,000,000 . P11,500,000 b. 10,000,000 d. P11,050,000 40. Total shareholders’ equity as of December 31, 2014 is a. 49,540,000 c. P49,450,000 b. 49,700,000 d. P49,504,000 PROBLEM NO. 9 Your firm has been engaged to examine the financial statements of Houston Corporation for the year 2014. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation. The client provides you with the information below. Houston Corporation ‘Statement of Financial Position December 31, 2014 Assets Current assets _P1,881,100 Current lial P 962,400 Other assets 5,171,400 fong-term liabilities 1,439,500 —__. Capital 4,650,600 27,052,500 Pz,052,500 age Tor? women ar openiinr eaeAustiting Problems SETA . As sea of current assets discloses the following: sh (restricted in the am ; ar tnt In rount of P400,000 for Tavestment inland P Szio0g counts receivable les jee Accounts S allowance of P30,000 480,000 — 645,100 + Other assets include: Prepaid expenses Plant and equipment less accumulated Bat calshreciation of P1,430,000 4,130,000 ‘ash surrender value of life i 84 Unamorized bend Histeunt ne Pater aco jotes receivable (short te 7 Rocdwia ( erm) 162,300 ss an 200 5.171.400 * Current liabilities include: Accounts payable Notes payable (due 2016) “157/400 Income tax payable 445,000 Share premium reserve 150,000 262,400 + Long-term liabilities include: Unearned revenue P 489,500 Dividends payable 200,000 8% bonds payable (due May 1, 2019) 750,000 21,439,500 + Capital includes: Retained earnings 2,810,600 Share capital, par value P10; authorized 200,0000 shares, 184,000 shares issued 1,840,000 24,650,600 Foga T8 of weerecrtecomo Aualting Problems SETA ‘The supplementary information below is also provided. a. On May 1, 2014, the company issued at 93.4, P750,000 of bonds to finance plant expansion. The long term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use straight-line method for discount amortization. b. The bookkeeper made the following mistakes: 1, In 2012, the ending inventory was overstated by P183,000. The ending inventories for 2013 and 2014 were correctly computed. 2. In 2014, accrued wages in the amount of P275,000 were ‘omitted from the balance sheet and these expenses were not charged on the income statement. 3, In 2014, a gain of P175,000 (net of tax) on the’ sale of certain ‘plant assets was credited directly to retained earnings. c. You learned on January 28, 2015, prior to completion of the audit, of heavy damage because recent fire to one of the entity's two plants; the loss will not be reimbursed by insurance. The plant has a carrying amount of P1,200,000 on the date of fire. QUESTIONS: Based on the above and the result of the au following: 41, The adjusted current assets as of December 31, 2014 is a. P1,296,100 c. P1,690,800 b. P1,505,800 d. 1,553,200 42, The adjusted current liabilities as of December 31, 2014 is dit, answer the a. P1,619,500 c. P1,659,500 b. P1,130,000 4, P1,419,500 43. The adjusted noncurrent liabilities as of December 31, 2014 is a. P907,400 c, P 857,900 b. P864,500 d. P1,554,000 Faget casei mn a4‘Auditing Problems, SETA 44, The adjusted equity as of December 31, 2014 is 4,525,600 ¢. P4,329,000 e@) 4,519,000 d. P4,479,000 45. When a subsequent event provides evidence about conditions that ‘existed at the balance sheet date, the auditor should do which of the following? (@) Assign a specialist. Ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures. Shop for an opinion that fits the desired type of event. d. Provide management with a new engagement letter to document the terms of the revised arrangement. PROBLEM NO. 10 You have been appointed as auditor of Portland Corporation, an SME. Presented below is the balance of Portland Corporation as of December 31, 2014. Portland Corporation Balance Sheet December 31, 2014 Assets Goodwill (Note 2) P 1,200,000 Buildings (Note 1) Fan 16,400,000 Inventories 3,121,000 Land vA 7,500.01 Accounts receivables V 1,700,000 Treasury shares (50,000 shares) 870,000 Cash on hand v 1,759,000 ~ Assets allocated to trustee for plant expansion Cash inbark =~ __ Zaonne P Treasury notes, at cost and fair value Bs ry t 4 Pane WD erecnrte.com.h Austing Problems SETA Equities Notes payables (Note 3) P 6,000,000 Share capital ~ Ordinary, authorized and issued, 1,000,000 shares, no par 11,500,000 Retained earnings ‘6,580,000 “Appreciation capital (Note 1) 5,700,000 Income taxes payable 750,000 Reserve for depreciation recorded to date on the building — 4,100,000 ‘£34.030.000 Note 17 Buildings are stated at revalued amount. The excess of Fevaluied amount over cost was P5, 700,000. Note 2: Goodwill in the amount of P1,200,000 was recognized because the company believed that book value was not an accurate representation of the fair market value of the company.” ‘The gain of P1,200,000 was credited-to retained earnings. Note 3: Notes payable are long-term except for the current installment due of P1,000,000. QUESTIONS: 46. the audited total current assets as of December 31, 2014 would amount to (2), P6,580,000 <. P8,660,000 6,850,000 4. P6,880,000 47. The net carrying value of property, plant and equipment would amount to -) P19,800,000 & P18,900,000 . Pi4,100,000 4. Pi9,900,000 48. Total shareholders’ equity as adjusted would amount to a. P28,460,000 <. P16,010,000 b. 21,710,000 (& 27,110,000 Foge or eae acon a | AP Oper BRTAuditing Problems SETA 49. Total assets as adjusted would amount to a, P22,760,000 ¢. P24,860,000 t b ) P28,460,000 d. P27,260,000 50. There are a number of accounting standards and disclosures that may not provide useful information to the users of SMEs. financial statements. Which of the following topics does the ‘andard for SMEs not address? a.) Earnings Per share. ~ Provisions and contingencies. c. Liabilities and equity. d. Revenue. - end of examination - Please submit your answer sheet Keep the questionnaire. Thank you «nations! ® for taking the PRTC Open Pre-Board Examinations iii ile Sinema iiilitastlashaomieant