CORDILLERA CAREER DEVELOPMNT COLLEGE

College of Accountancy
Buyagan, Poblacion, La Trinidad, Benguet

Accounting 9a
Auditing Problems

Problem 1.
The Ismael & Associates has assigned you to audit the financial statements of ALMORA TRADING COMPANY for the
year 2020.  The company is a dealer of appliances and has several branches in Benguet.  Its main office is located in
Baguio City.  You were given by the company controller the unadjusted balances of the items to be included in the
company’s statement of financial position and statement of income as of and for the year ended December 31,
2020.  Audit findings are as follows:

I.  AUDIT OF CASH

    A cash count was conducted by your staff on January 7, 2021.  The petty cash fund of P60,000 maintained by the
company on an imprest basis reflected a balance of P22,750.  Un-replenished expenses totaled P37,250 of which P9,510
pertains to January 2021.

    You were furnished a copy of the company’s bank reconciliation statement with Chartered Bank as follows:
    Balance per bank                                                        P277,994
                   Add:    Deposit in transit                                 248,836
                             Bank debit memos                               712,750
                             Returned check                                     63,000
                   Less:   Outstanding checks                             (174,580)
                             Book error                                           (72,000)
                   Balance per books                                      P1,056,000

    Your review of the reconciliation statement disclosed the following:

    1.  Postdated checks totaling P107,400 were included as part of the deposit in transit.   These represent collections from
various customers whose accounts have been outstanding for less than three months.  These checks were actually
deposited on January 8, 2021.

    2.  Included in the deposit in transit is a check from a customer for P63,000 which was returned by the bank on December 27,
2020 for insufficiency of funds.  This account has been outstanding for over six months.  The check was replaced by the
customer on January 15, 2021.

    3.  The bank debited the account of Almora Trading Co. for P710,000 as payment of notes payable including interest of
P10,000 due on December 26, 2020.  This was not recorded as of year-end.

    4.  A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as P102,900.   This was in payment of
accounts payable.

    5.  Bank service charges totaling P2,750 were not recorded.

II.  AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

    It is the company’s policy to provide allowance for doubtful accounts as follows:
                   Less than 3 months                 P2,500,960             1%
                   3 to 6 months                             843,200             5%
                   Over 6 months                            274,500            10%
                   Total                                    P3,618,660
    An analysis of the accounts receivable schedule showed that several long outstanding accounts for more than a year
totaling P152,460 should be written-off.

III.  AUDIT OF MARKETABLE SECURITIES – TRADING

    The company’s equity portfolio as of year-end showed the following:

                                                      Total             Market Value
                                                     Shares                  Cost              per Share
                   Bacnotan Cement            7,000              P108,500             P16.00
                   Fil-Estate                      10,000                195,000              19.75
                   Ionics                            2,400                  49,200              24.00
                   La Tondena                    2,000                  67,000              26.00
                   Selecta                          8,000                  31,600                1.20
                   Union Bank                     1,600                  50,880              27.50
                                                                            P502,180
    The securities are listed in the stock exchange.  The company follows the fair value accounting.
 IV.  AUDIT OF NOTES RECEIVABLE
    The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.  This is covered by a promissory
note with interest at 15% per annum dated November 1, 2020.  No interest has been accrued on the note as of
December 31, 2020.

V.  AUDIT OF PREPAYMENTS
    Prepaid expenses account consists of the following:
            Prepaid advertising                  P 640,000
            Prepaid insurance                      490,000
            Prepaid rent                             420,000
            Unused office supplies                361,000
                                                     P1,911,000
    Almora Trading Co. renewed its contract with an advertising agency for the annual promotion as well as the regular
advertisement of its products.  It paid a total of P640,000, P100,000 of which is for the Christmas promotion while the
balance is for the regular promotion and which will run for one year starting on August 1, 2020.   Payment was made on
July 20, 2020, and the total amount was reflected as prepaid advertising.

    The company leases the main office and store in Baguio City at a monthly rental of P140,000.  On November 5, 2020, a
check for P420,000 was issued in payment of three-month rental as per renewal contract which was effective on
November 1, 2020.  Rental deposit remained at three months and is included under other assets.

    The company’s delivery equipment is insured with Fortune Insurance Corporation for a total coverage of P2.4
million.  Total payment made on November 16, 2020 for the renewal amounted to P490,000 which covers the period from
November 1, 2020 to November 1, 2021.  No adjustment has been made as of December 31, 2020.

    To take advantage of volume discount ranging from 10% to 20%, the company buys office and store supplies on a bulk
basis.  The staff-in-charge bought supplies worth P220,000 on June 10, 2020 and included the same in their office
supplies inventory.  As at year-end, unused office supplies amount to P102,500.

VI.  AUDIT OF INVENTORIES
    A physical count of inventories was conducted simultaneously in all stores on December 29 and 30, 2020.  Your review of
the list submitted by the accountant disclosed the following:
    1.   Some deliveries made in December 2020 have not been invoiced and recorded as of year-end.  These items had a selling
price of P146,940 with term of 15 days.  The corresponding cost was already deducted from the ending inventory.
    2.   Goods on consignment to Almora Trading Co. totaling P356,000 were included in the inventory list.
    3.   Some appliances worth P138,500 were recorded twice in the inventory list.
    4.   Goods costing P153,800 purchased and paid on December 26 was received on January 4, 2021.  The goods were shipped
by the supplier on December 28, FOB shipping point.

VII.  AUDIT OF PROPERTY, PLANT AND EQUIPMENT

    The company purchased additional equipment worth P268,000 on June 30, 2020.  At the date of purchase, it incurred the
following additional costs which were charged to repairs and maintenance account:
                   Freight-in                         P30,400
                   Installation cost                  13,000
                     Total                             P43,400

    The above equipment has an estimated useful life of ten years and estimated salvage value of P20,000.   Depreciation for
the above equipment has been provided based on original cost.

    The company discarded some store equipment on October 1, 2020, realizing no salvage value.  The cost of these
equipment amounted to P165,520 with an accumulated depreciation of P138,620 on December 31, 2020.  Depreciation
booked from October 1, 2020 to year-end was P10,480.  No entry was made on the disposal of the property.

VIII.  AUDIT OF ACCRUED EXPENSES

    Some expenses for December 2020 were recorded when paid in January 2021 which included the following:
                   Electric bills                                          P73,400
                   Commission of sales agents                       57,000
                   Telephone charges                                  42,500
                   Minor repair of delivery equipment              21,340
                   Water bills                                             18,760
                     Total                                               P213,000

IX.  AUDIT OF LIABILITIES
    Almora Trading Co. obtained a one-year loan from Chartered Bank amounting to P2.6 million at an interest rate of 16%
per annum on October 1, 2020.  Accrued interest on this loan was not taken up at year-end.

X.  OTHER AUDIT FINDINGS

    A review of the minutes of meeting showed that a 10% cash dividend was declared to shareholders of record as of
December 15, 2020, payable on January 31, 2021.
 Almora Trading Company
UNADJUSTED TRIAL BALANCE
December 31, 2020

                                                                                   Debit            Credit
Petty cash fund                                                             P 60,000
Cash in bank                                                               1,056,000
Trading securities                                                           483,640
Accounts receivable – trade                                           3,618,660
Allowance for doubtful accounts                                                          P 110,360
Notes receivable                                                          1,300,000
Inventories                                                                 7,274,900
Prepaid advertising                                                         640,000
Prepaid insurance                                                           490,000
Prepaid rent                                                                  420,000
Office supplies inventory                                                  361,000
Furniture and fixtures                                                   1,298,400
Delivery equipment                                                      2,770,000
Accumulated depreciation                                                                  1,177,500
Other assets                                                                  548,000
Accounts payable – trade                                                                   2,356,320
Notes payable                                                                                 3,300,000
Accrued expenses                                                                               169,040
Bonds payable                                                                                 5,000,000
Discount on bonds payable                                               500,000
Ordinary share capital                                                                       5,400,000
Retained earnings                                                                               792,160
Sales                                                                                           13,078,000
Cost of goods sold                                                       8,034,000
Operating expenses                                                      3,357,000
Other income                                                                                  1,453,500
Other charges                                                                625,280                    
                                                                            P32,836,880    P32,836,880

Determine the adjusted balances of the following:  (Ignore tax implications and show your calculation in good form)
N.B. No Solution, No Points.

  1.  Petty cash fund

  2.  Cash in bank
   
  3.  Trading securities

  4.  Accounts receivable    

  5.  Allowance for doubtful accounts

  6.  Notes and interest receivable

  7.  Inventories               

  8.  Prepaid insurance

  9.  Prepaid rent

10.  Prepaid advertising

11.  Office supplies inventory

12.  Total current assets

13.  Property, plant, and equipment

14.  Accumulated depreciation

15.  Accounts payable

16.  Interest payable

17.  Total current liabilities

18.  Sales
19.  Cost of goods sold

20.  Operating expenses

II. Multiple Choice ( For Class Standing) ( 2 points each)

1.A company holds bearer bonds as a short-term investment. Responsibility for the custody of these bonds and for the
submission of coupons for periodic interest collections probably should be delegated to the_________________.

2. A company has temporarily excess funds to invest. The board of directors decided to purchase marketable securities, and it
assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make period
review of the investment activity would be the _________________________.

3. A company makes a practice of investing excess short-term cash in marketable securities. A reliable test of the valuation of
those securities is
a. comparing cost data with current market quotations.
b. confirming securities held by the broker.
c. recalculating investment carrying value using the equity method.
d. calculating premium or discount amortization

4. No employee should be able to visit the corporate safe deposit box containing investment securities without being
accompanied by another corporate employee. What consequence might follow if this rule were not enforced?
a. An employee could pledge corporate investments as security for a short term personal bank loan.
b. An employee could steal securities and the theft would never be discovered.
c. It would be impossible to get a fidelity bond on the employee.
d. There would be no record of when company personnel visited the safe deposit box.

5. Which of the following controls should management have in place to provide reasonable assurance about asset impairment
judgments?
a. A policy requiring the reconciliation of the physical asset count with the property ledger.
b. Limits to physical access of long-lived assets.
c. A systematic process to identify assets that are not currently in use.
d. A formal budgeting process.

6. Which of the following can be used by organizations for obtaining financing?

a. Notes
b. Mortgages
c. Bonds
d. All of the above

7. Inherent risks related to debt obligations primarily include which of the following?
a. Debt is not properly authorized.
b. Interest expense is not properly accrued.
c. Debt covenants are not properly disclosed.
d. All of the above are inherent risks related to debt obligations.

8. Which of the following statements is true regarding preliminary analytical procedures for debt obligations and shareholders’
equity transactions?
a. Because there are typically only a few shareholders’ equity transactions, the auditor is not required to perform
preliminary analytical procedures for shareholders’ equity accounts.
b. Trend analysis would not typically be performed for debts obligations.
c. The long term debt to equity ratio could be considered by the auditor as part of the preliminary analytical
procedures.
d. All of the above statements are true.

9. Which of the following would an auditor typically not perform as part of gaining an understanding of the client’s controls
related to debt obligations?
a. Review the client’s documentation of controls.
b. Recalculate interest expense.
c. Inquire of management about the process of reviewing compliance with debt covenants.
d. Review policies related to approval required for new debt.

10. Several years ago, Amway Inc. secured a conventional real estate mortgage loan. Which of the following audit procedures
would be least likely to be performed by an auditor examining the mortgage balance?
a. Examine the current years’ canceled checks.
b. Review the mortgage amortization schedule.
c. Inspect public records of lien balances.
d. Re-compute mortgage interest expense.

/dbay-an