PRELIMINARY EXAMINATION

COLLEGE OF ACCOUNTANCY
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1
Dr. Catherine O. Aquino, CPA

Name: ____________________________________ Score: _______

Problem 1

Identify by letter the assertions addressed in each of the following substantive procedures
relation to the audit of revenue and collection cycle:

Assertions:

A. Existence or Occurrence
B. Rights and Obligations
C. Completeness
D. Valuation and Allocation
E. Presentation and Disclosure

Substantive Procedure:
1. Perform cash receipt cut off test __________
2. Confirm bank balances ______________
3. Prepare bank reconciliation __________
4. Foot cash disbursement journal and trace posting to general ledger ___________
5. Review bank confirmation replies to identify cash balances held as compensating
balances or liens for borrowings________
6. Conduct cash count_________
7. Prepare bank transfers schedules____________
8. Account for all check numbers of check issued __________
9. Review bank statement ______
10. Test translation of foreign currency ____________
Problem 2. Presented below are a series of unrelated situations. Answer the following questions
relating to each of the independent situation as requested.

1. ANDREI Company's unadjusted trial balance at December 31, 2006 included the ff accounts:

Debit Credit
Accounts Receivable 1,000,000
Allowance for doubtful accounts 40,000
Sales 15,000,000
Sales returns and allowances 700,000
Andrei Co. estimates its bad debt expense to 1 1/2 % of net sales. Determine its bad debt expense
for 2006?
a) 225,000 b) P254, 500 c) P214, 500 d) 55,000

2. An analysis and aging of CZARINA Corp. accounts receivable at December 31, 2006
disclosed the ff:

Amounts estimated to be uncollectible 1,800,000

Accounts receivable 17,500,000
Allowance for DA (per books) 1,250,000
What is the net realizable value of Czarina's receivables at December 31, 2006?

3. LIZA Company provides for doubtful accounts based on 3% of credit sales. The following
data are availale for 2006.
Credit sales during 2006 21,000,000
Allowance for DA 1/1/06 170,000
Collection of accounts written off in prior years 80,000
(Customer credit sales reestablished)
Customer accounts written off as uncollectible during 2006 300,000
What is the balance in allowance for DA at December 31, 2006
a) 630,000 b) P420,000 c) P500,000 d) 580,000

4. At the end of its first year of operations, Dec. 31, DONNALYN Inc. reported the ff.
information:
Accounts Receivable, net of allowance 9,500,000
Customer accounts written off as uncollectible during 2006 240,000
Bad debts expense 2006 840,000
What should be the balance in accounts receivable at December 31, 2006 before subtracting the
allowance for doubtful accounts?
a) 10,100,000 b) P10,340,000 c) P9,740,000 d) 10,580,000

5. The following accounts were taken from FRANCEL Inc. balance sheet at December 31, 2006
Debit Credit
Accounts Receivable 4,100,000
Allowance for doubtful accounts 100,000
Net credit sales 7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported?
a) 123,000 b) P23,000 c) P223,000 d) 225,000
Problem 3. You have been asked by the proprietor of the ABEM CO. to verify the
accountability of the cashier-bookkeeper, who was allowed to take vacation leave a few days
ago.

A. The bank reconciliation statements prepared by the cashier-bookkeeper are presented

below:
November 30, 2016
Balance per bank statement P21,500
Cash on hand 500
Total P22,000
Outstanding checks:
No. 2520 P2,000
2521 1,400
2522 1,900 (3,300)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P20,200

December 31, 2016

Balance per bank statement P135,000
Cash on hand 6,300
Total P141,300
Outstanding checks:
No. 2674 P31,000
2675 10,300
2676 5,000 (41,300)
Erroneous bank charge 3,000
Erroneous bank credit (600)
Book balance P102,400

B. The Cash in Bank account in the general ledger shows the following debits and credits
during December:
Cash in Bank
Dec.   Dec.
1 Balance P20,200 1 Checks issued P2,000
2 Received from customers 4,500 5 Checks issued 5,200
7 Received from customers 5,000 14 Checks issued 31,000
12 Received from customers 20,000 24 Checks issued 46,000
17 Received from customers 30,000 28 Checks issued 7,600
23 Received from customers 9,000
27 Received from customers 70,000
31 Received from customers 48,500 31 Balance 102,400
Total P198,200 Total P198,200
 C. The following summarized transactions were taken from the bank statement for the
month of December 2016:
Balance, December 1, 2016 P16,500
Total deposits P173,700
The total deposits per bank statement include:
a. Collection of notes receivable P5,000
b. Correction of November erroneous bank
charge 2,000
c. December 10 deposit of Lava, Inc. credited
in error to Abem 600
Total P7,600

Total checks P65,200

The total checks per bank statement include:
a. Correction of November erroneous bank
credit P500
b. December check of Nile Co. charged in
error to Abem 3,000
Total P3,500

D. Cash on hand per count in the morning of January 2, 2017, amounted to P6,300.

E. Before leaving his company for a one-week vacation, the proprietor had left several
signed blank checks that the cashier-bookkeeper had cashed for his personal use.

1. What is the cash shortage as of November 30, 2016?

A. P5,000 C. P33,000
B. P7,000 D. P13,200

2. The amount of unaccounted receipts in December is

A. P11,000 C. P9,000
B. P13,200 D. P15,100

3. The amount of unrecorded/unsupported disbursements in December is

A. P15,100 C. P7,000
B. P10,900 D. P5,000

4. What is the total cash shortage as of December 31, 2016?

A. P26,000 C. P33,000
B. P15,100 D. P7,000

5. What is the adjusted cash balance on December 31, 2016?

A. P102,400 C. P87,400
B. P125,000 D. P111,400
Problem 6. HANNAH DAWN Corp. had the following long-term receivable account balances at December
31, 2007:
Notes Receivable from the sale of division 4,500,000
Notes Receivable from officer 1,200,000
Transactions during 2008 and other information relating to company’s long term receivables were
as follows:
1. The P4,500,000 note receivable is dated May 1, 2007, bears interest at 9% and represents the
balance of the consideration received from the sale of the HANNAH DAWN 's electronics division to
Bahag Co. Principal payments of P1,500,000 plus appropriate interest are due on May 1, 2008, 2009 and
2010. The first principal and interest payment was made on May 1, 2008. Collection of the note
installments is reasonable assured.

2. The P1,200,000 note receivable is dated December 31, 2007 bears interest at 8% and is due on
December 31, 2010. The note is due from HANNAH DAWN, president of Derla Co. Interest is payable
annually on December 31 and interest payments were paid on their due dates through December
31, 2008.

3. On April 1, 2008. HANNAH DAWN sold a patent to Tambak, Inc. In exchange for a P400,000 non
interest-bearing note due on April 1, 2010. There was no established exchange price for the patent, and the
note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2008 was 12%.
The present value of 1 for two periods at 12% is 0.797. The patent carrying value of P80,000 at January
1, 2008 and the amortization for the year ended December 31, 2008 would have been P16,000. The
collection of the note receivable from Tambak is reasonable assured.

4. On July 1, 2008, HANNAH DAWN sold a parcel of land toWarren Company for P400,000 under an
installment sale contract. Warren made a P120,000 cash down payment on July 1, 2008 and signed a 4-year
11% note for the P280,000 balance. The equal annual payments of the principal and interest on the note will
be P90,250 payable on July 1, 2009, through July 1, 2012. The land could have been sold at an established
cash price of P400,000. The cost of the land to HANNAH DAWN was P300,000. Circumstances are such
that the collection of the installments on the note is reasonable assured.

Based on the preceding information, determine the following:

1. Total long term receivables at December 31, 2008

2. Total current portion of long term receivables at December 31, 2008

3. Accrued interest receivable at December 31, 2008

4. Total interest income for the year ended December 31, 2007

5. Unamortized discount at December 31, 2008 on note receivable from sale of patent

Problem 7
DAFFODIL AUTO PARTS sells new parts to auto dealers. Company policy requires that a
prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the
shipping clerk writes the date in the shipping document, the last shipment made in the year ended
December 31, 2014, was recorded on document 3167. Shipments are billed in the order that the
billing clerk receives the shipping document.
For late December 2014 and early January 2015, shipping documents are billed on sales
invoice as follows:

Shipping Document No. Sales Invoice No.

3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334

The December 2014 and January 2015 sales journals have the following information included:
Sales Journal- December 2014
Day of the Month Sales Invoice No. Amount of Sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774
Sales Journal- January 2015
Day of the Month Sales Invoice No. Amount of Sale
1 5332 P264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658

1. What is the net overstatement (understatement) of Daffodil’s sales for the year ended
December 31, 2014?
A. P21,318 C. (P253,452)
B. P253,452 D. (P21,318)
 2. What adjusting entry is necessary to correct Daffodil’s financial statement for the year
ended December 31, 2014?
A. Accounts receivable 21,318
Sales 21,318
B. Accounts receivable 253,452
Sales 253,452
C. Sales 21,318
Accounts receivable 21,318
D. Sales 253,452
Accounts receivable 253,452

3. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management’s assertion of
A. Rights and obligations
B. Completeness
C. Existence
D. Valuation and allocation

4. Tracing shipping documents to prenumbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped
D. All prenumbered sales invoices were accounted for

5. An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial statement
assertion of
A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Completeness
Problem 8

The JUNNEL COMPANY had weak internal controls over its cash transactions. Facts about its
cash position at November 30, 2014 were as follows:

The cash books showed a balance of P94,508, which included undeposited receipts. A credit of
P500 on the bank’s records did not appear on the books of the company. The balance per bank
statement was P77,750. Outstanding checks were no. 8420 for P581, no. 8422 for P750, no. 8430
for P1,266, no. 8621 for P954, no. 8623 for P1,034, and no. 8632 for P726.

The cashier stole all undeposited receipts in excess of P18,972 and prepared the following
reconciliation:

Balance per books, Nov. 30, 2014 P94,508

Add: Outstanding checks
8621 P954
8623 1,034
8632 726 2,214
96,722
Less: Undeposited receipts 18,972
Balance per bank, Nov. 30, 2014 77,750
Less: Unrecorded credit 500
True cash, Nov. 30, 2014 P77,250

1. What is the correct amount of cash that should be on hand for deposit on November 30,
2014?
A. P23,069 C. P22,569
B. P18,972 D. P22,069

2. How much was stolen by cashier?

A. P3,597 C. P4,097
B. P3,097 D. P 0

3. The cashier attempted to conceal theft by

I. Not listing all outstanding
II. Underfooting outstanding checks shown on the reconciliation.
III. Adding an item to the bank balance that should be deducted from the book
balance.
A. I and II only C. I and III only
B. II and III only D. I, II, and III

4. Taking only the information given, which of the following internal control deficiencies
allowed the cashier to steal cash and conceal his theft?
A. The cashier is also responsible for preparing the reconciliation.
B. No one other than the cashier is responsible for tracing cash receipts to the deposits in

the bank.
C. Both A and B.
D. Neither A nor B.

5. What is the adjusted cash balance as of November 30, 2013?

A. P95,008 C. P94,008
B. P91,411 D. P87,814
Problem 9

Bank Reconciliation

The cash receipts and the cash payments of LIEZEL COMPANY for April 2014 follow:

Cash Receipts (CR) Cash Payment (CP)

Date Cash Debit Check No. Cash Credit
April 2 P208,700 4113 P44,550
8 20,350 4114 7,350
10 27,950 4115 96,500
16 109,350 4116 33,200
22 92,700 4117 73,600
29 53,000 4118 50,000
30 16,850 4119 31,600
Total P528,900 4120 83,750
4121 5,000
4122 120,650
Total P546,200

The cash account of Liezel Company shows the following information at April 30, 2014:

CASH
Date Item Ref. Debit Credit Balance
April 1 Balance 95,550
30 CR 6 528,900 624,450
30 CP 11 546,200 78,250

Liezel Company received the following bank statement on April 30, 2014:
Bank Statement for April 2014
Beginning balance P95,550
Deposits and other Credits:
April 1 P16,300 EFT
4 208,700
9 20,350
12 27,950
17 109,350
22 68,400 BC
23 92,700 543,750
Checks and other Debits:
April 7 P44,550
13 69,500
14 45,150 US
15 7,350
18 33,200
21 10,950 EFT
26 73,600
30 50,000
30 1,000 SC (335,300)
Ending balance P304,000

Explanation: EFT -- electronic funds transfer

US -- unauthorized signature
BC -- bank collection
SC -- service charge

Additional data for the bank reconciliation include the following:

 A. The EFT deposit was a receipt of monthly rent. The EFT debit was a monthly insurance
payment.
B. The unauthorized signature check was received from Lester Soon.
C. The P68,400 bank collection of a note receivable on April 22 included P9,250 interest
revenue.
D. The correct amount of check number 4115, a payment on account, is P69,500. (Liezel’s
accountant mistakenly recorded the check for P96,500).

1. What is the amount of deposits in transit on April 30?

A. P53,000 C. P45,150
B. P69,850 D. P115,000

2. What is the amount of outstanding checks on April 30?

A. P241,000 C. P286,150
B. P337,500 D. P310,500

3. What is the amount of bank receipts in April?

A. P543,750 C. P459,050
B. P527,450 D. P528,900

4. What is the amount of bank disbursements in April?

A. P290,150 C. P289,150
B. P335,300 D. P316,150

5. What is the correct cash balance as of April 30?

A. P132,850 C. P122,150
B. P87,700 D. P223,150

Problem 10

The following are the balances as of December 31, 2014 of certain accounts of Roman Company
in relation to your audit of the company’s 2014 financial statements:

Accounts Receivable P12,200,000

Merchandise Inventory 6,500,000
Sales 75,000,000
 Cost of Sales 54,000,000
The company uses the periodic inventory system, and the merchandise inventory balance
above is the result of the physical count conducted on December 30, 2014 at the close of
business hours. All merchandise received up to December 30, 2014 have been included in the
count and all merchandise shipped to customers up to December 30, 2014 have been eliminated
from the count. It takes at least three days to reach destination.
You conducted a sales cutoff test and the following information has been revealed:

December 2014 recorded sales:

Selling price Cost Shipping Terms Shipment date

P26,000 P20,000 FOB shipping point Dec. 26, 2014

85,000 70,000 FOB destination Dec. 28, 2014

120,000 92,000 FOB shipping point Dec. 30, 2014

90,000 67,000 FOB destination Dec. 30, 2014

64,000 50,000 FOB shipping point Dec. 31, 2014

January 2015 recorded sales:

Selling price Cost Shipping Terms Shipment date

P155,000 P121,000 FOB shipping point December 31

200,000 150,000 FOB destination December 30

220,000 168,000 FOB destination December 29

43,000 32,000 FOB shipping point January 3, 2015

55,000 42,000 --- January 3, 2015**

** The goods were made to customer’s specifications, were completed on December 30,
2014 bet were requested by the customer to be delivered in January, 2015.
Goods out on consignment costing P80, 000 and with sales price of P120, 000 were not
included in the physical count. These goods have been recorded as sales when they were shipped
out to consignees. Verification with the consignees indicated that only 60% of these goods had
been sold as of December 31, 2014.
The company has already set up Cost of Sales account in its books, after conducting the
physical count. Determine the adjusted balances of
1. Accounts Receivable
a. 12,492,000 c. 12,540,000
b. 12,582,000 d.12,272,000
2. Inventory
a. 6,319,000 c. 6,437,000
b. 6,469,000 d. 6,519,000
3. Sales
a. 74,917,000 c. 75,292,000
b. 75,017,000 d. 75,120,000
4. Cost of Sales
a. 53,910,000 c. 54,063,000
b.54,181,000 d. 54,031,000

Problem 11

The J Company included the following in the notes receivable a of December 31, 2017:

Note receivable from the sale of land P 880,000

Note receivable from consultation P1,200,000
Note from the sale of equipment P1,600,000

In connection with your audit, you were able to gather the following transactions during 2017
and other information pertaining to the company’s note receivable:

On January 1, 2017 J Company sold a tract of land to three doctors as an investment. The land
purchased 10 years ago was carried on J Company’s book at values of P500, 000. J received a
non interest bearing note for P880,000 from the doctors. The note is due on December 31, 2018.
There is no readily available market value for the land, but the current market rate of interest for
comparable notes is 10%.

On January 1, 207 J Company finished consultation services and accepted in exchange a

promissory note with a face value of P1,200,000 a due date of December 31, 2019 and a stated
rate of 5% with interest receivable at the end of each year. The fair value of the services is not
readily determinable and the note is not readily marketable. Under the circumstances, the note is
considered to have an appropriate imputed rate of interest of 10%.

On January 1, 2017 J Company sold equipment with a carrying amount of P1,600,000 to S

Company. As a payment, S gave J Company a P2,400,000 note. The note bears an interest rate of
4% and is to be repaid in three annual installments of P800,000 (plus interest on the outstanding
balance). The first payment was received on December 31, 2017. The market price of the
equipment is not reliably determinable. The prevailing rate of interest for notes of this type of
14%.

The following data are also available:

Present value of 1 for 2 periods at 10% 0.8264

Present value of 1 for 3 periods at 10% 0.7513
Present value of an annuity of 1 for 3 periods at 10% 2.4869

Based on the above and the result of your audit, answer the following. (Round off present value
factors to four decimals and the final answers to the nearest hundred)

Questions:

1. The consultation service fee revenue that should be recognized in 2017 is

a. P1,050,800 b. P1,095,800, c. P901,600 d. P1,200,000

2. The gain on sale of equipment that should be recognized in 2017 is

a. P331,600 b. P257,280 c. P412,400 d. P800,000

3. The noncurrent notes receivable as of December 31, 2017 is

a. P2,605,706 b. P1,825,800 c. P2,494,000 d. P2,625,700

4. The current portion of long term notes receivable as of December 31, 2017 is
a. P1,600,000 b. P1,680,000 c. P1,469,000 d. P800,000

5. The interest income to be recognized in 2017 is

b. P464,000 b. P435,800 cP459,500 d. P156,000

Problem 12

QJ Company’s balance in the Allowance for uncollectible accounts was P154,000 at January 1,
2014. During 2014, credit sales totaled P9,000,000, interim provision for uncollectible accounts
were made at 2% of credit sales, P95,000 of bad debts were written off, and recoveries of
accounts previously written off amounted to P15,000. QJ installed a computer facility in
November 2014 and an aging of accounts receivable was prepared for the first time as of
December 31, 2014. A summary of the aging is as follows:

Classification by month of Sales Balance in Each category Estimated % Uncollectible

November-December 2014 P1,080,000 2%
July – October 2014 650,000 10%
January-June 2014 420,000 25%
Prior to 1/1/2014 150,000 70%

Based on the review of the collectability of the account balances in the “prior to 1/1/2014” aging
category, additional receivables totaling P60,000 were written off as of December 31, 2014. The
70% uncollectible estimate applies to the remaining P90,000 in the category. Effective with the
year ended December 31, 2014 QJ adopted a new accounting method for estimating the
allowance for uncollectible accounts at the amount indicated by the year-end aging analysis of
the accounts receivable.

1. In the audit adjusting entries, how much additional uncollectible accounts expense should be
provided at December 31, 2014?

a. P60,600 b. P194,000 c. P240,600 d. P254,600

2. How much uncollectible accounts expense should be presented on the statement of

comprehensive income for the year ended December 31, 2014?

a. P60,600 b. P194,000 c. P240,600 d. P254,600

3. At what amount should Accounts Receivable be presented on the statement of financial

position at December 31, 2014?

a. P1,985,400 b. P1,999,400 c. P2,003,400 d. P2,240,000