AKLAN STATE UNIVERSITY

SCHOOL OF MANAGEEMENT SCIENCES

BANGA, AKLAN

PrE 2 Auditing and Assurance: Concepts and Applications 1

Mid-Term Examination

Name: Year &Sec.: Date:

Direction: Read the question properly and handwritten your final answer on separate piece of paper. No
erasure. Take a picture and send it to me thru FB Messenger or email. Cheating is forbidden.
Part 1: THEORY. Choose the letter of correct answer. (2 points each)
1. For assurance engagements regarding historical financial information, reasonable assurance engagements
assurance engagements are called
a. Audits
b. Reviews
c. Compilations
d. Exanimations

2. The purpose of an audit of financial statements is to

a. Relieve management or those charged with governance of the responsibility for the preparation and
presentation of the financial statements.
b. Obtain an absolute level of assurance that the financial statements as a whole are free from material
misstatement.
c. Enhance the degree of confidence of intended users in the financial statements.
d. Assure the future viability of the entity by expressing an opinion on the entity’s financial statements.

3. The primary reason for a financial statement audit by an independent CPA is to

a. Provide increased assurance to users as to the fairness of the financial statements.
b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be
discovered.
c. Satisfy governmental regulatory requirements.
d. Relieve management of responsibility for the financial statements.

4. On receiving a client’s bank cutoff statement, an audit most likely would trace
a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
b. Deposits in transit in the cutoff statement to the year-end bank reconciliation.
c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.
d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.

5. Which of the following describes the most effective preventive control to ensure proper handling of cash
receipt transactions?
a. Have bank reconciliations prepared by an employee not involved with cash collections and then have
them reviewed by a supervisor.
b. Have one employee issue a prenumbered receipt for all cash collections; have another employee
match daily totals of prenumbered receipts to bank deposits.
c. Use predetermined totals (hash totals) of cash receipts to control posting routines.
d. Have the employee who receives customer mail prepare the daily bank deposit; have another
employee actually make the deposit.

Part 2: PROBLEM. Choose the letter of correct answer. (3 points each)

1. The following data were reported by Atom Company during the current year:
Allowance for doubtful accounts – January 1 P25,000
Allowance for doubtful accounts – December 31 40,000
Uncollectible accounts written off during the current year 8,000
Recoveries of accounts previously written off 2,000

How much is the total bad debts expense during the current year?
a. P9,000
b. P15,000
c. P21,000
d. P23,000

2. The following data were reported by Matter Company during the current year:

Prepaid Rent – January1 P200,000

Prepaid Rent – December 31 250,000
Rent Payable – January 1 80,000
Rent Payable – December 31 65,000
Rent Expense – accrual basis 850,000
 How much is the total rent expense under the cash basis of accounting?
a. P800,000
b. P865,000
c. P885,000
d. P815,000

3. In your cash audit of the Taal Company as of December 31, 2019, you gather the following:
Balance per books P1,000.00
Balance per bank 1,000,000
Bank charges 2.50
Outstanding checks 237.50
Deposit in transit 312.50
Customer’s note collected by bank 375.50
Interest on customer’s note 15.00
Customer’s check returned NSF 62.50
Depositor’s note charged to account 250.00
The correct cash balance amounts to
a. P1,000.00
b. P1,012.50
c. P1,075.00
d. P1,150.00

4. The following facts apply to Maya Company during 2018:

1. Savings account of P900,000 and a checking account balance of P1,200,00 are held at Manila
Bank.
2. Money market placement with maturity of 3 months P7,500,000.
3. Currency and coins on hand amounted to P11.550.
4. Travel advances of P270,000 for the first quarter of next year (employee reimbursement will be
through salary deduction).
5. Maya Company purchased P3,100,000 of commercial paper of Oto Corp., which is due in 60 days.
6. A separate cash fund amounting to 2.250,000 is restricted for the retirement of long-term debt.
7. Petty cash fund of P1,500.
8. An IOU from an employee of Maya Company in the amount of P2,000.
9. Two certificates of deposit, each totaling P500,000. These CDs have a maturity of 120 days.
10. Maya Company had received a check from a customer in the amount of P187,500 dated January
15, 2019.
11. On January 1, 2018, Maya Company purchased marketable equity securities to be held as “trading”
for P3,000,000. On December 31, 2018, its market value is P4,300,000.
What amount should be reported as cash and equivalents on December 31, 2018?
a. P13,763,050
b. P12,713,050
c. P12,751,500
d. P12,763,050

5. ABC Company had the following balances at the beginning of 2020:

Cash P400,000 Notes payable P500,000

Inventory 280,000
Equipment 400,000 Ordinary share 350,000
capital
Furniture and fixture 250,000 Share premium 50,000
Accumulated (65,000) Retained earnings 365,000
depreciation
P1,265,000 P1,265,000

During the year, sales of P4,000,000 and purchases of P2,000,000 were made on cash basis. The
inventory on December 31, 2020 is P180,000. Expenses (including taxes, excluding depreciation
and interest) amounting to P1,200,000 were incurred and paid.

Equipment, furniture and fixture are depreciated by the company using straight line method.
The estimated life of the aforementioned assets is 10 years.

Eastern company issued bonds on June 1, 2020 at face value of P300,000 with 14% interest
payable semiannually every June 1 and December 1. The bonds will mature on June 1, 2025.

There were 100,000 ordinary shares outstanding on January 1, 2020. The par value of ordinary
shares is P3.50. No additional shares were issued in 2020.

On December 1, 2020, the company declared cash dividend of P2 per share payable on
February 1, 2021.
5. How much should be reported as cash in the December 31, 2020 statement of financial position?
a. P1,182,000
b. P1,500,000
c. P2,000,000
d. P1,482,000

6. How much should be reported as total assets in the December 31, 2020 statement of financial position?
a. P1,500,000
b. P1,265,000
c. P2,247,000
d. P2,182,000

7. How much should be reported as total liabilities in the December 31, 2020 statement of financial position?
a. P500,000
b. P800,000
c. P900,000
d. P903,000

8. How much should be reported as total equity in the December 31, 2020 statement of financial position?
a. P1,229,000
b. P1,279,000
c. P879,000
d. P350,000

9. How much should be reported as retained earnings in the December 31, 2020 statement of financial
position?
a. P879,000
b. P614,000
c. P365,000
d. P100,000

10. Zeta Company reported sales revenue of P4,600,000 in its income statement for the year ended
December 31, 2019. Additional information is as follows:

12/31/2018 12/31/2019
Accounts
receivable 1,000,000 1,300,000
Allowance for uncollectible accounts 60,000 110,000
Zeta wrote off uncollectible accounts totaling P20,000 during 2019.
Under the cash basis of accounting, what amount should be reported as sales revenues for 2019?
a. P4,900,000
b. P4,350,000
c. P4,300,000
d. P4,280,000

Part 3: PROBLEM SOLVING. SHOW YOUR SOLUTION (20 POINTS)

The company’s trial balance as of January 31, 2020 is as follows.

United, Inc.
Trial Balance
January 31, 2020
Debit Credit
Cash P23,150
Accounts receivable 43,000
Notes receivable 12,000
Allowance for doubtful accounts P1,470
Inventory, January 1, 2020 32,600
Furniture and fixture 108,000
Accumulated depreciation – furniture and fixture 28,500
Unexpired insurance 3,000
Office supplies unused 1,770
Accounts payable 7,800
Notes payable 13,600
Ordinary share capital 100,000
Retained earnings 18,000
Sales 158,000
Sales returns and allowances 1,800
Purchases 82,000
Transportation in 2,000
 Advertising expenses 1,500
Delivery expenses 1,800
Office salaries 10,200
Interest expense 4,000
Rent expense 1.500
Interest income 950
P328,320 P328,320

Additional information as of January 31, 2020:

a. Furniture and fixtures are being depreciated at 10% yearly.
b. Estimated bad debts is 0.5% of net sales.
c. Insurance expired in January is P500.
d. Supplies used in January amounted to P335.
e. Unpaid salaries for January is P500.
f. Interest accrued on notes payable is P450.
g. Interest unearned on notes receivable amounts to P175.
h. Average gross profit earned is 35% of net sales.

Required:
After considering the above information, you are to determine the following for January 2020 (Ignore income
tax): (Show your solution.)
1. Net sales
2. Cost of sales
3. Gross profit
4. Expenses
5. Net income

End of Mid-Term Examination

“Hard work is worthless for those that don’t believe in themselves” – Naruto Uzumaki

Prepared by: Noted by:

ANDREA D. NAVARRA, CPA BENEDICT B. BOMBAES, CPA, DPA

SMS, Instructor SMS, Dean
 AKLAN STATE UNIVERSITY
SCHOOL OF MANAGEEMENT SCIENCES
BANGA, AKLAN

PrE 3 Auditing and Assurance: Concepts and Applications 2

Mid-Term Examination

Name: Year &Sec.: Date:

Direction: Read the question properly and handwritten your final answer on separate piece of paper. No
erasure. Take a picture and send it to me thru FB Messenger or email. Cheating is forbidden.
Problem 1: Financial Statement Impact of Liability Transactions
Presented below is a list of possible transactions:
1. Purchased inventory for P80,000 on account (assume perpetual system is used).
2. Issues an P80,000 note payable in payment on account (see item 1 above).
3. Recorded accrued interest on the note from item 2 above.
4. Borrowed P100,000 from the bank by signing a 6-month, P112,000, noninterest-bearing note.
5. Recognized 4 months’ interest expense on the note from item 4 above.
6. Recorded wage expense of P35,000. The cash paid was P25,000; the difference was due to various
amounts withheld.
7. Recorded employer’s payroll taxes.
8. Accrued accumulated vacation pay.
9. Recorded an asset retirement obligation.
10. Recorded bonused due to employees.
11. Recorded a contingent loss on a lawsuit that the company will probably lose.
12. Accrued warranty expense (assume expense warranty approach).
13. Paid warranty costs that were accrued in item 12 above.
14. Recognized cash sales of P75, 260, which includes 6% sales tax.
15. Recorded estimated liability for premium claims outstanding.
Required: Set up a table using the format shown below and analyze the effect of the 15 transactions on the
financial statement categories indicated. (2 points each)
No. Assets Liabilities Owners’ Equity Net Income
1

Use the following code:

Increase Decrease No effect

Part 2: Problem Solving (Show your Solution)

1. On January 1, 2019, Kevin Company purchased a machine for P2,750,000. The machine was depreciated
using the sum of years’ digits method based on a useful life of 10 years with no residual value. On January
1, 2020, the entity changed to straight line method of depreciation. What is the depreciation for 2020? (5
points)
2. On January 1, 2019, Kevin Company purchased a machine for P2,750,000. The machine was depreciated
using the sum of years’ digits method based on a useful life of 10 years with no residual value. On January
1, 2020, the entity changed to straight line method of depreciation. What is the depreciation for 2020? Ben
Company reported net income for a two-year period as follows:
Year Net Income
2020 P6,000,000
2021 P8,000,000

In an audit of the statement for the year ended December 31, 2020, the following errors are discovered:
1. The Company paid one-year insurance premium of P240,000 effective April 1, 2020. The entire amount
was debited to asset account and no adjustment was made at the end of 2020.
2. The company leased a potion of its building for P480,000. The term of the lease is one year ending April
30, 2021. Collection of rent was credited to unearned rent revenue account. At the end of 2020, no
entry was made to take up the earned portion of the amount collected.
3. Depreciation expense in 2020 was understated by P12,500.
4. Deprecation expense in 2021 was overstated by 14,000.
5. Bad debts expense of P10,000 was not recorded in 2020.

Compute for the adjusted net income in 2020 and 2021 and retained earnings as of the years ended
December 31, 2020 and 2021. Follow the table below: (10 points)
 Net Income Retained Earnings
2020 2021 2020 2021

Problem 3: Various Current Liabilities Transactions

The following information relate to X Company’s obligations as of December 31, 2019, the end of its fiscal
year.
Item A. Accounts Payable
Accounts payable per general ledger control amounted to P340,000, net of P15,000 debit balances in
suppliers’ accounts. The unpaid vouchers file included the following items that had not been recorded as
of December 31, 2019.
a. Alta Supply Company – P14,000 merchandise shipped on December 31, 2019, FOB destination;
received on January 10, 2020.
b. Cosio, Inc. – P12,000 merchandise shipped on December 26, 2019, FOB shipping point; received on
January 16, 2020.
c. Solid Services – P9,000 janitorial services for the three-month period ending January 31, 2020.
d. Manila Electric Company – P4,200 electric bill covering the period December 16, 2019 to January
15, 2020.
On December 28, 2019, a supplier authorized X to return goods billed at P10,000 and shipped on
December 20, 2019. The goods were returned by X on December 28, 2019, but the P10,000 credit memo
was not received until January 6, 2020.

Item B. Payroll
items related to X’s payroll as of December 31, 2019 are:
Accrued salaries and wages P48,000
Payroll deduction for:
Income taxes withheld 3,500
SSS contributions 4,000
Medicare contribution 1,000
Advances to employees 5,000

Item C. Note Payable

A note payable to the Bank of the Philippine Islands for P150,000 is outstanding on December 31, 2018. The
note is dated October 1, 2018, bears interest, at 18%, and is payable in three equal annual installments of
P50,000. The first interest and principal payment was made on October 1, 2019.

REQUIRED: Determine the adjusted balances of current liabilities and show your solution on the following:
(15 points)
a. Item A
b. Item B
c. Item C

End of Mid-Term Examination

“Growth occurs when ones goes beyond one’s limits. Realizing that is also part of training” – Itachi Uchiha

Prepared by: Noted by:

ANDREA D. NAVARRA, CPA BENEDICT B. BOMBAES, CPA, DPA

SMS, Instructor SMS, Dean