Saint Columban College College of Business Education Pagadian City Auditing Problems Midterms. Instructions: Answer the problems with your mind and when you have no answer let your heart guide you and most of the time it will be correct. Problem 1 ‘A Company is an importer and wholesaler. Its merchandise is purchased from a number of suppliers and is warehouse until sold to consumers In conducting his audit for the year ended December 31,2018, the Company's CFA determined that the system of internal control was good. Accordingly, he observed the physical inventory at an interim date, November 30, 2018, instead of year end The following information was obtained from the general ledger: Inventory, January 1, 2018 90,000 Inventory, November 30, 2018 225,000 Sales for 11 months ended November 30, 2018 800,000 Sales for the year ended December 31,2018 950,000 Purchases for 11 months ended Nov 30, 2018 (before audit adjustments) 720,000 Purchases for year ended December 31, 2018 (before audit adjustments) 810,000 Additional Information is as follows: a. Goods received on November 28 but recorded as purchases in December 10,000 b. Deposits made in October 2018 for purchases to be made in 2019 but charged to Purchases 14,000 ¢. Defective Merchandise returned to suppliers: Total at November 30, 2018 5,000 Total at December 31, 2018 12,000 ‘The returns have not been recorded pending receipt of credit memos from the suppliers. ‘The defective goods were not included in the inventory. 4d. Goods shipped in November under FOB destination and received in December were recorded as purchases in November 18,500 e. Through the carelessness of the client’s warehouseman, certain goods were damaged in December and sold in the same month at its cost 20,000F. Audit of the clients November inventory summary revealed the following: Items duplicated 3,000 Purchased in transit: under FOB Shipping point 12,000 under FOB destination 18,500 items counted but not included in the inventory summary 7,000 Errors in extension the overvalued the items 4,000 1. The correct amount of net purchases up to November 30, 2018 is. A. 716,000 8. 682,500 C. 682,500 . 706,500 2. The correct amount of net purchases up to December 31, 2018 is A. 765,500 8. 803,000 €. 784,000 D. 789,000 3. The correct inventory on November 30, 2018 is ‘A. 206,500 B. 214,500 c. 237,000 D.218,500 ‘4. What is the gross income for eleven months ended November 30, 2018? A. 234,000 8. 217,000 €. 224,000 D. 237,500 5. What is the estimated inventory on December 31, 2018 ‘A. 183,100 8, 175,900 c. 184,400 1. 190,000 Problem 2 Engaged as external auditor of B company on February 28, 2013, you were unable to observe the taking of inventory on December 31, 2012, which was reported to amount to 360,000. The following data, however, were gathered by you: Inventory December 31,2011 320,000 Purchases during 2012 43,410,000 Cash sales during 2012 350,000 Shipment received on Dec. 26, 2012, included inPhysical inventory but not recorded as purchases 10,000 Deposits made with suppliers, entered as purchases goods were no received in 2012 20,000 Collections on Accounts Receivable 1,800,000 Accounts Receivable, Jan 12012 250,000 Accounts Receivable, Dec. 31, 2012 300,000 Gross profit percentage on sales 40% 6. How much is the Total Goods available for Sale? A. 1,740,000 8. 1,400,000 €. 1,720,000 D. 1,420,000 7. How much is the Cost of Sales? A. 1,320,000 B. 2,200,000 . 1,310,000 D. 1,300,000 8. How much is the credit sales? 1,850,000 . 1,750,000 - 1,800,000 1,900,000 COeP 9. How much is the inventory per audit? ‘A. 350,000 B. 360,000 C. 380,000 D. 400,000 10. The estimated inventory shortage at December 31, 2012? ‘A. 40,000 8. 50,000 C. 60,000 DoProblem 3 ‘On May 31, 2019, a fire completely destroyed the Work in Process inventory of 8 Company. Physical inventory figures were published as follows: As of January 1, 2019 ‘As of May 31, 2019 Raw materials 15,000 30,000 Work-in-Process 50,000 - Finished Goods 70,000 60,000 Sales for the five months of 2012 were 150,000. Raw materials purchased were 50,000. Freight no purchases was 5,000. Direct Labor for the five months was 40,000. To determine the value of lost inventory, the insurance adjusters have agreed to use an average gross profit rate of 32.5%. Assume that manufacturing overhead was 45% of the direct labor cost. 11. The value of the goods manufactured and completed as of May 31,2012 was A. 60,000 8, 90,000 c. 95,000 D.91,250 12. Raw Materials used during the first five months of 2012 were ‘A, 25,000 B, 35,000 ¢. 40,000 . 45,000 13, The total value of goods put into process during the five-month period amounted to A. 143,000 8, 150,000 C. 168,000 , 148,000 1A, The valve of the destroyed work-in-process inventory as determined by the insurance adjusters would be A. 56,750 8, 65,750 C. 86,750 0. 57,650 Problem 4 ‘A portion of the S Company's balance sheet appears as follows: December 31,2012 December 31, 2011 Assets: Cash 353,300 100,000 Notes Receivable 0 25,000 Inventory ? 199,875 Liabilities Accounts Payable 75,000S company pays for all operating expenses with cash and purchases all inventory on credit. During 2012, cash totaling 471,700 was paid on accounts payable. Operating expenses for 2012 totaled 220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was 32.6 during January 2012 and increased .1 per month during the year. S sells only one product. All sales ‘are made for 50 per unit. The ending inventory for 2011 was valued at 32.5 per unit. 15, Total units sold during 2012 ‘A. 18,300 8, 18,400 ¢.18,500 D. 18,600 16, Total purchases for 2012 ‘A. $80,000 B. 585,670 C. 596,700 1D. 592,300 17. Accounts payable on December 31, 2012 is ‘A. 203,530 8. 201,350 . 200,000 D. 201,000 18. How much units is the beginning inventory? A.6,130 8. 6,000 C.6,200 0. 6,150 A. 192,500 B. 192,950 €. 192,000 D. 193,000 20. Net income for the year ended 2012 ‘A. 89,530 8. 95,625 C.96,375, 0.97,235,Problem 5 The following data were taken from the financial statements of Agnes Inc. a calendar-year merchandi 1. Balance Sheet Data Dec. 31, 2011 Dec. 31, 2012 Accounts Receivable, Net 84,000 78,000 Inventory 150,000 140,000 Accounts Payable 95,000 98,000 2. Total sales were 1,200,000 for 2012 and 1,100,000 for 2011. Cash sales were 20% of total sales each year. 3. Cost of Goods sold was 840,000 for 2012 4, Variable general and adm istrative expenses for 2012 were 120,000. They have varied in proportion to sales. 50% hhave been paid in the year incurred and 50% in the following year. Unpaid general and administrative expenses are not included in the accounts payable above. 5. Fixed general and administrative expenses, including 35,000 depreciation and 5,000 bad debt expenses, totaled 100,000 each year. 80% of fixed general and administrative expenses involving cash were paid in the year incurred and 20% the following year. Each year there was a 5,000 bad debt estimate and a 5,000 write-off. Unpaid general and administrative expenses are not included in accounts payable above, 21. Cash collected during 2012 resulting from total sales in 2011 and 2012 ‘A. 1,200,000 B. 1,191,000 c. 1,198,000 D. 1,201,000 22.Cash disbursed during 2012 for purchase of merchandise ‘A. 825,000 8. 827,000 c. 828,000 D. 830,000 23, Cash disbursed for 2012 for variable and fixed general and administrative expenses ‘A. 165,000 8. 175,000 c. 188,000 . 195,000 Problem 6 ‘You have been asked to review the records and prepare corrected financial statements for Twin Corporation. The books of account are in agreement with the following balance Sheet Twin Corporation BALANCE SHEET December 31, 2012Assets lial Cash 5,000 ‘Accounts Payable 2,000 Accounts Receivable 10,000 Notes Payable 4,000 Notes Receivable 3,000 Share Capital 10,000 Inventory 25,000 Retained Earnings 27,000 Total 43,000 Total 43,000 ‘A review of Twin's books indicates that the following errors and omissions had not been corrected during the applicable years: Dec. 31 Inventory Inventory Prepaid Unearned Accrued ‘Accrued Overvalued Undervalued Expense Revenue Expense Revenue 2009 : 6,000 900 - 200 : 2010 7,000 - 700 400 1s 125 2011 8,000 - 00 : 100 - 2012 : 9,000 600 300 50 150 ‘According to the books, profits are 5,500 in 2010, 6,500 in 2011, and 7,500 in 2012. No dividends were declared there years and no adjustments were made to retained earnings. Assume the company started operations in 2009. 24, Adjusted profit (loss) for 2009 a. 7,500 b.14,200 8,500 4. 20,000 25. Adjusted profit (loss) for 2010 a. 7,850 b. (7,850) ©. 7,900 d. (7,900) 26. Adjusted profit (loss) for 2011 5,550 b. 5,650 5,450 .5,750 27. Adjusted profit (loss) for 2012 a. 21,000 b, 22,500 ¢. 24,500 4, 25,000 28, Adjusted Retained Earnings in December 31, 2012 a. 27,000 b. 36,500 €. 36,200 36,400Problem 7 ‘The owner of a trading company engaged your services as auditor. There is a discrepancy between the company’s -ome and the sales volume. The owner suspects that the staff is committing theft. You are to determine whether or not this is true. Your investigations revealed the following: 1. Physical inventory, taken December 31, 2012 under your observation, showed that cost was 26,500 and market value 25,000. The inventory of January 1, 2012 showed cost of 39,000 and market value of 37,500, Itis the firms practice to value inventory at “lower of cost or market”. Any loss between cost and market value is included in “Other expenses” 2. The average gross profit rate was 40% of net sales 3. The accounts receivables as of January 1, 2012 were 13,500. During 2012, accounts receivables written off during the year amounted to 1,000. Accounts receivable as of December 31, 2012 were 37,500 4. Outstanding purchase invoice amounted to 50,000 at the end of 2012. At the beginning of 2012 they were 37,500 5. Receipts from customers during 2012 amounted to 300,000 6. Disbursements to merchandise creditors amounted to 200,000 29, The total sales for 2012 ‘A.277,000 8. 300,000 . 324,000 D. 325,000 30. The total purchase for 2012 is ‘A.187,500 8. 200,000 €. 212,500 1D. 325,000 31. Adjusted Inventory as of December 31, 2012 A. 50,000 8. 55,000 C. 60,000 1D. 65,000 32. The amount of inventory shortage is ‘A. 30,000 B. 30,600 C. 45,000 . 95,000 Problem 8 The Isabela Company is a wholesale distributor of automatic replacements parts. Initial amounts taken from Isabela’s accounting record are as follows: Inventory at December 31,2012 (based on physical count) is 1,250,000. Accounts Payable Schedule at December 31,2012yeni Terms /endor Amount 2/10, net 30 Bee 265,000 net 30 coo. sa0iK00 co. net 30 300,000 feo. net 30 225,000 Feo net 30 : ecm. net 30 - Total 41,000,000 Sales in 2012 9,000,000 Additional Information is as follows: 1. Parts held on consignment from C company to Isabela, the consignee, amounting to 155,000, were included in the physical count of goods in Isabela’s warehouse on December 31,2012 and in accounts payable in December 31, 2012. 2. P 22,000 of parts which were purchased from F Company and paid for in December 2012 were sold in the last week of 2012 and appropriately recorded as sales of 28,000. The parts were included in the physical count of goods in Isabela’s ‘ware house on December 31, 2012 because the parts were in the loading dock waiting to be picked up by the customers. 3, Parts in transit on December 31, 2012, to customers, shipped FOB shipping point on December 28, 2012, amounted to 34,000. The customers receive the parts on Jan 6, 2013. Sales of 40,000 to the customers for the parts were recorded by Isabela on January 2, 2013. 4. Retailers were holding 210,000 at cost (250,000 at retail) of goods consignment from Isabela, the consigner, at their stores on 12/31/12. 5. Goods were in transit from G Company to Isabela on December 31, 2012. The cost of good was 25,000 and they were shipped F.0.8. shipping point on December 29, 2012. 6. A quarterly freight bill in the amount of 2,000 specifically relating to merchandise purchases in December 2012, all of which was still in the inventory at December 31, 2012, was received on January 3, 2013. The freight bill was not included in either the inventory or in accounts payable at December 31, 2012. 7. All of the purchases from B Company occurred during the last seven days of the year. These items have been recorded in accounts payable and accounted for in the physical inventory at cost before discount. Isabela’s policy is to pay invoiced in time to take advantage of all cash discounts, adjust inventory accordingly and record accounts payable, net of cash discounts. 33. Total Net adjustments to Inventory A. 52,700 8. 54,700 60,000 0. 58,00034, Total Net adjustments to Accounts Payable A, (133,300) 8, (135,300) . (135,000) . (133,000) 35, Adjust Inventory as of December 31, 2012 ‘A. 1,302,700 8. 1,304,700 . 1,310,000 D. 1,308,000 36. Adjust Accounts Payable as of December 31, 2012 ‘A, 866,700 8. 864,700 C. 865,000 1. 867,000 37 Adjust Sales for 2012 ‘A. 9,000,000 8, 9,030,000 .9.040,000 1D. 9,050,000 Problem 9 In connection with your examination of the financial statements of Ruth Tambok, Inc. for the year ended December 31, 2013, you were able to obtain certain information during your audit of the accounts receivable and related accounts. © The December 31, 2013 balance in the Accounts receivable control accounts is P837, 900. © Anaging schedule of the accounts receivable as of December 31, 2013 is presented bleow: ‘Age Net debit balance Percentage to be applied after corrections have been made 60 days and under 387, 800 ‘PERCENT 61 to 90 days 307, 100 2 PERCENT 91 to 120 days 89, 800 5 PERCENT | ‘Over 120 days 53, 200 Definitely uncollectible, 9,000; the remainder is estimated to be 25% uncollectible Total P837, 900 ‘Two entries made in the Doubtful Accounts Expense account were: 1. A debit on December 31 for the amount of the credit to the allowance for doubtful accounts.2. Acredit for P6, 100 on November 30, 2013, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2013. ‘* The allowance for Doubtful Accounts schedule is presented below: Debit Credit | Balance January 1, 2013 P19, 700 November 30, 2013 P6, 100 13, 600 December 31, 2013 P41, 895 P55, 945 (P837, 900 X 5%) ‘© There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on sales contract. Required: Based on the above and the result of your audit, answer the following: 38. How much is the adjusted balance of accounts receivable as of December 31, 2013? A. 522,500 | 8. 535,200 : . 533, 800 { D. 533,500 f 39. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2013? A. 25,475 823,523 . 25,432 D. 24,522 | 40. How much is the doubtful accounts expense for the year 20132 | A. 19,252 B. 20, 875 €.18,523 0. 21,524 41. How much is the net adjustment to the doubtful accounts expense account? A. Decrease by 14,920 8. Increase by 15,120 €. Decrease by 15,120 D. Increase by P14, 920PROBLEM 10 In connection with the audit of the financial statements of Charm Corporation, your audit senior instructed you to examine the company’s accounts receivable. Prior to any adjustments you were able to extract the following balances from Charm’s trial balance as of December 31, 2013: Accounts receivable P 1,327, 500 Allowance for doubtful accounts 45, 000 From the schedule of accounts receivable as of December 31, 2013, you determined that this account includes the following: Accounts with debit balances: 60 days old and below P715, 500 61 to 90 days, 351, 600 Over 90 days 256,200 P1, 324, 200 Advances to officers 49, 200 Accounts with credit balances (45, 000) Accounts receivable per GL 1, 327, 500 The credit balance in customer's account represents collection from a customer whose account had been written of as uncollectible in 2012. Accounts receivable for more than a year totaling P63, 000 should be written off. Confirmation replies received directly from customers disclosed the following exceptions: ‘Customer. Customer's comment Audit findings ‘Swernette ‘The good sold on December 1 | The client failed to record were returned on December _| credit memo no. 23 for P36, 16, 2013 000. The merchandise wasincluded in the ending i — _ inventory at cost. Ramil We do not owe this amount _| Investigation revealed that *%H@ (bad word).we did not _| goods sold for P48, 000 were receive any merchandise from | shipped to Ramil on your company December 29, 2013, terms FOB shipping point. The goods were lost in transit and the shipping company has acknowledged its responsibility for the lost | merchandise. Jojo Tam entitled to a 10% ‘Anne is an employee of employee discount. Your bill | Charm.starting November should be reduced by P3, 600 | 2013, all company employees were entitled toa special _ discount. Efem We have not yet sold the Merchandise billed for P54, goods. We will remit the 000 were consigned to Efem proceeds as soon as the goods | on December 30, 2013. The are sold. goods cost P39, 000. Dodong, ‘We do not owe you P60, 000. | The sale of merchandise on We already paid our accounts | December 18, 2013 was paid as evidenced by OR #1234 —_| by Dodong on January 6, 2014. Francis Reduce your bill by P4, 500 __| This amount represents freight paid by the customer for the merchandise shipped ‘on December 17, 2013, terms, FOB destination-collect. Based on your discussion with Charm’s credit manager, you both agreed that an allowance for doubtful accounts should be maintained using the following rates: 60 days old and below 1% 61 to 90 days 2% Over 90 days 5Required: Based on the above end the result of your audit, answer the following: 42. The adjusted balance of accounts receivable in the 60 days and below category as of December 31, 2013. A. 615,300 B. 616,000 C. 617, 400 D. None of the Above 43. The adjusted balance of accounts receivable as of December 31, 2013. A. 1,162, 200 B. 1,250,000 €. 1,120,000 D. 1,350,000 44. The adjusted allowance for doubtful accounts as of December 31, 2013. ‘A. 22,500 B. 22, 866 C. 22,560 D. 23,502 45. The entry to adjust the allowance for doubtful accounts. A. Allowance for doubtful accounts 4, 134 Doubtful accounts expense 4, 134 8. Doubtful accounts expense 4, 134 Allowance for doubtful accounts 4, 134 C. Allowance for doubtful accounts 4, 155 Doubtful accounts expense 4, 155 D. Doubtful accounts expense 4, 155 Allowance for doubtful accounts 4, 155 46. To gather audit evidence about the proper credit approval of sales, the auditor would selects a sample cof documents from the population represented by the a. Bill of lading b. Customer order file c. Sales invoice file d. Subsidiary customers’ account ledgerPROBLEM 11 Efemela Company produces paints and related products for sale to the construction industry throughout Davao City. While sale have remained relatively stable despite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the company’s customers are paying their bills. The company sells its products on payment terms of 2/10,n/30. In the past, over 75 percent of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. During the year ‘ended December 31, 2013, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% of the customers are now taking the discount. Uncollectible accounts as 2 percentage of total credit sales have risen from the 1.5% provided in the past years to 4% in the current year. In response to your request for more information on the deterioration of accounts receivable collections the company’s controller has prepared the following report: Efemela Company Accounts receivable Collections December 31, 2013 The fact that some credit accounts will prove uncollectible is normal. And annual bad debt wite offs had been 1.5% of total credit sales for many years. However, during the year 2013, this percentage increased to 4%. The accounts receivable balance is P1, 500, 000, and the condition of this balance in terms of age of collection is shown below: Proportion to total ‘Age of accounts Probability of collections 64% 1-10 days 99.0% 18% 11-30 days 97.5% 8% Past due 31- 60 days 95.0% 5% Past due 61-120 days 80.0% 3% Past due 121-180 days 65.0% 2% Past due over 180 days 20.0% At the beginning of the year, the allowance for doubtful accounts had a credit balance of P27, 300. The company has provided for a monthly bad debt expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2013 amounted to P8, 000, 000, and write-offs of uncollectible accounts during the year totaled P22, 500.Required: 47. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2013? A. P77, 100 8. 76,100 C. 78,500 D. 76,450 48. The necessary adjusting entry to adjust the allowance for doubtful accounts as of December 31, 20137 A. Allowance for doubtful accounts 22,300 Doubtful accounts expense 22,300 8. Doubtful accounts expense 22,300 Allowance for doubtful accounts 22,300 C. Allowance for doubtful accounts 21,200 Doubtful accounts expense 21,200 D. Doubtful accounts expense 21,200 Allowance for doubtful accounts 21,200 49. An aging analysis of accounts receivable would provide an indication as to the a. Validity of the accounts b. Integrity of the credit grantors €. Collectability of the accounts 4. Solvency of the customers 50. Which account balance is most likely to be misstated if an aging of accounts receivable is not performed? a. Allowance for bad debts b. Accounts receivable €. Sales returns and allowances d. Sales revenue 51. An auditor selects a sample from the file of shipping documents to determine whether prepared. This test is performed to satisfy the audit objective of a. Accuracy b. Control ¢. Completeness d. Existence