The

BoA School.of ‘Accountancy pe ee = we AUDITING PROBLEMS: o

@Tel. No. 735-9807 & 734-3989 » 2 BE oo _TRENEO/ESPENILEA

“AUDITING PPROBLEMS. PREWEEK MATERIALS

The CPA Board Examination Sylabus for AUDITING, Effective May 2019 Examinations

* AUDITING THEORY’ -
1.0 Fundamentals ofAuditing: and fAssurance Services . woot : 2a a
1.1 Introduction:-to -assurarice engagements: - oe : De Be ces : re, *
“. s1.401 Nature, objective and elements <2 : : , we
L-1.2- Types of assurance: engagements (audits, reviews, other assurance engagements)
: 1.1.3 Assurance service vis-a- vis. attestation services - vos ; :
1.2 Introduction to auditing “0. ’ Olas ; “By oe
~ A. 2d Nature,pphilosophy,.and objectives . oS a : . a
Y 2. f-audit-. “ Os ; : no :
. T According to nature = oF assertion/ data4 (financial statement audit, operational
“audit, - mo, 2 . / we
and. compliance audit) : oe. s
“42.2.2 ‘According to types sie ‘Auditor (external independent financial statements audit,
rnat audit, and ‘government audit) .
2. 0 The Financial ‘Statentents. Audit -Client Acceptance, Audit Planning, Supervision and Monitoring,
2:1:Overview of the ‘audit process: ay . : . .
“2.2 Pre-engagement ‘procedures : Bo
°2.3 Scope and purposes of audit planning| eS
2. 3. 4 Essential ‘planning requirements oo :
-Knowledge’of the business. a
2 Preliminary: apalytical procedures :

ag ke 2.3 5 Overall auditnae ‘and audit: program (experts, internal auditor, other’
‘ independent : auditors) eens a
~ 2A Direction, supervision and review" \ :
3.0 Understanding the Entity: and its Environment Inelucing its InternatControl and Assessing, the Asks. of
‘Material Mistatement 0 ©
*
3:¥ Industry, ‘regulatory anid’ athier external: factors, Including ‘the epplcable fj nancial reporting framework
Oe . BL 9’ Nature
Obie of the: entity.

3.2.1 Basic concepts and ‘€lements ‘of internat control ae eg s

“3: 2.2: Consideration: ‘of accounting and-intérnat control systems” Lah Saree
: 3.2.2.1 Understanding and documentation o Ate a : Cee
o 3:2.2.2 Assessment.of: control riskg hoy See ane Be eS
ia 3,2.2:2:1 Test of-controls eS, ee UE OS :
ween Me 2.2 Documentatidn ~ * lg fee
# ig he ‘tigks of matériat misstatement on : Mae wok
soe Se BBY 1 Fraud ‘and errors eee ; a mes 2
"es 3.3.2 Risk assessment: procedures: ace ‘ Ee
oS 3°33 Discussion among the engagement team : . Pe ee ST on
33.4 Significant: risks that require special audit’ consideration a '
~ 33 Risks’ for whieh substantive procedures: alone do hot Provide sufficient appropriate sual
evidence7 an) : cS .
3U3%6 Revision’ tgrisk assessment ~ ey :
eto 3/4 Communicating with those charged with governance and management: Po
4. 0 Audit Objectives,” Procedurés, Evidences and ‘Documentation * me . : oe soe ae
4.4 Nature-and significarice” 3 Pe c we
4.2-Evidential matters” ne Er 2 aga
4.3 Audit procedures/techniques’ BERGE IEE SP oan Pes . Ser bed
- Od. 4:Auditworking papers > oe se SO dae ei ao
a 9 Completing: the Audit/ Post-Audit Responsibilities eae ne re yo ~
S:1 Completing thé ‘addit-and audit report preparation i \ Pe hs
oe “SCL Analytical procedures for overall feviews (oess PR yy es en : a
5:4.2 Related party transactions... ae Choe SS eS ede
* 503 Subsequent events review i eee s “ ‘ ws oS
2 Bede 4 Assessment of going concern:reagsumiption ;
5i1:5 Obtaining client's ‘representation etter. 2 ae
"5.6 Evaluating findings; formulating an pinion: and: dating the audit report oe
y 5:2Post-audit yesponsibilities' =. : o ‘i ‘
: i
“2 2 '5 2b Subsequent discovery of facts. 2 | ae
5.2.2 ‘Subsequent ‘discovery: of omitted. procedures
6. oO Reports on Audite: Financial: Statements :
(7.6.1 The unqualified: auditor's réport, < " ey es
6.2 Basic elementsof the unqualified auditor's report oe as : pe Re
6:3 Modified auditor's report. wae ae
6.3.1 Matters thatdo.- not affect the atiditor’ § Opinion.
6.3.2: Matters that, do: affect the auditor’ 5 opinion
| Report on comparatives oS
\ 7, 0 Auditing inva Computerized Information Systems (cis) Environment . Cae A Red
fob Faternal: control ina eS environment”
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1A Introduction Bo , :
1.2 Impact of computers on accoustting and internal control systems LS
7.1.24 General controls . i
S 7.4.2.2 Application contruis
8 We Unique characteristics of specific Cis oe
aie! oTA.SA. Stand alone
/ WAL3:2 On-line: .
cee 7.1.3.3 Database systern.-
, me 2 Basic approach tothe audit of cis environment
. ‘ ~~ F217 Introduction...
‘ % 7.2.2 Effects of computers on the audit process.”
7.2.3 Computer assisted’ audit techniques :
8:0 Other Assurance and Non- assurance: Services. : . “
8.1 Procedures and-réports on speciai purpose audit, engagements PO eS me
8.1.1-General considerations ~< : :
8.1.2 Audit of financial statements ‘Prepared, in accordance with a comprehensive basis of
‘accounting other.than©
GAAP-in-the Philippines- : :
“8.1.3 Audit of a component of financial statements "
8.1.4: Reports on compliance with contractual. agreements:
: 8.1.5 Reports on summarized financial statements
. 8.2 Nonaudit engagements: procedures and reports
8.2.1 Examination of prospective financial information-
8.2.2 Engagements to review financial statements -
8.3 Nonassurance engagements :
8.3.1°Engagements to perform agreed- upon: procedures regarding financial information LO
8.3.2 Engagements to compile. financial information. : : . ,
- 9.0 Updates on Special Concerns wo ~ oe ‘
QA Globalization a
9,2 Digital and Information Technology _
9.3 Governance and Ethics
9.4 Regulatory Requirements and Considerations:
3.5 Effective Business Communication

A G-PROBLEMS ~
“2 1.0 Evidente Accumulation and Evaluation = < Substantive Tests of Trarisactions and Balances
1.1 Audit of: the revenue and receipt cycle ‘ " :
ae 1,4.1 Audit of sales and re enue transactions
a 2 Audit of ‘@xpendituré and disburs sement cycle ..
1,2.1 Audit of acquisitions and purchases 09° —_ so
"1.2.2 Audit of payroli transactions. ~~ = PE a
1.2.3 Audit of inventory balances : : 3
“4.2.4 Audit of trade payable balances s
1.2.5 Audit of prepaid expenses and accrued liabilities:
4 3 Audit of. production cycle : :
S131 Audit of conversion activities : : ”
43,2) Audit of inventory ‘balances: work-in- process and finished goods
. 1.3.3 Audit of'cost of goods seid: balance ‘
21.4:Audit of the: finanicirig cycle
4:41 Audit of financing cycle transactions
1.4.2 Audit.of non-trade liability balances. ’ :
/: 44,3 Audit of interest expense and finance cost balances
hoes “1.4.4 Audit’ of equity accounts
“1:5. Audit of investing cycle : ey : oe
: 1.5.1 Audit of investing transactions e fe oe As Se
1.5.2 Audit of investment account, balances ae a
“1.5.3, Audit of property, plant/and equipment account ‘balances:
1.5.4 Audit of intangible account balances ~ oy
1.6 Audit of cash balances. oo a
"1.6.1 Audit of cash receipt transactions balance ~
ae 6.2 i ‘of cash disbursement, transactions. balance

| AUDITING PROBLEMS — PREWEEK MATERIALS (IRENEG/ESPENILLA) 702

3
 BALANCES
ES

“in undertaking ‘pre-engagement activitiess with an objective. to create a decision whether tto ‘continue. or
77

discontinue’ servicing. a continuing: cHent or to accept or ‘eject a prospective pilot iient, the auditor should. .
consider thé: following, except: "
a ithe! requirements of. PSQC 1 on ‘acceptance and retention of client. mS :
: " The requirements. of the code: of professional ethics in relation to professional ‘appointment. . :
“The requirements of PSA 315 on obtaining an understating of the: elients internal control to plan :
-the*audit:
‘de ~All of the above are considerations during the pre-engagement activities in-an.n audits

2. ‘In rendering audit planning, after deciding fo accept/eontinue ‘servicing’ a client, ‘the auditor ‘has an-overall
* -objective-to determine the audit:approach, thatis, the. nature, timing and extent of audit procedures. Which’:
of the following i: the basis to come up witha decision regarding the matter?
cl ae The preliminary “assessment of audit risk based:on understanding of the client's business and.
eS ae ‘industry including the: design and operation of: internal control (detection ‘risk and. control risk)
Gi =: b.-The-preliminary assessment of audit risk baséd.on understanding of the client’s business and
. ». <> jndustry including: the: ‘design and: operations of internal control: (inherent risk and-controi pe:
cc. The prelimiriary assessment of, audit risk based on ‘understating of the client’s business and--
-- industry including the effectiveness of. internal control Gnherent and contrat: risk)~
‘d. None of the above is correct.

Bw Which of: the following is a correct decision regarding: audit planning?

vac Where-inherent and control risk-cambined is at.a high Teveldétection risk. is5 placed ata
>. Considerable’ high level to warrant the gathering .of more persuasive evidence using more. “
* extensive audit procedtires which-are.placed at year-end worth of transactions/account balances.
: bi Where inherent and control risk combined is at ahigh level, detection risk is:placed ata
ot oS ‘corisiderable ‘high: level to-warrant the gathering: of fess persuasive evidence using less extensive. -
: (2 8 audit procedures which aré placed at interim-period worth of transactions/account balances.
tis Where inherent.and control risk combined is.at.a high level, ‘detection. risk is placed at a
considerably jow level to warrant the gathering-of more persuasive evidence using more
extensive audit procedures: which are plated attyear-end worth off transactions/account balances.
de: Rane ofthe above: bs correct. Be e eg oe
AIGA or
4. After assessnient’
2 ‘ofinherent anid conte risk, the auditor decided to place: ‘detection risk in‘relation to-his .
audit of receivables at ‘a-considerably level, which of the following would normally follow?
, Perform sales: cut-off procedure: to entries, several days befare and: after the balance sheet date
“ipethe' sates journal: BORA sa va fel Se os
b, . Test the reasonableness of the clients’ policy of providing. bad debt allowance.
cy Observe the.client’s performance of controls over, the revenue, cycle.
d, oSeélect’ customer accounts to fender positive confi rmation.

5. During the ‘auait planning, PSA. 345 requires: ‘an auditor to obtain ary waderstandiig of the ‘client’s business
and industry: including internal control sufficient to- determine the: planned : audit approach, which of the
boy following is-not, rendered with such‘an objective? =:
oo]. Taquiry: of people within. and outside the organization regarding the business and operating
transactions of the entity. ©” . .
‘by... Inspection.af.decuments, through “transaction, walk cthrough”.
c.. Observation. of the performance: ‘of controls to confirm understanding of them gathered through
ou. 2 preliminary inquiry. .- =
du: Analytical procedure to. test the reasonableness of, an account balance.
7 b

6. > after audit planning, based on his preliminary assessment: of audit risk, the additor decided to render a “no- Bs
“reliance approach’? audit, Which of the fallowing'is.consistent with-this decision? . : :
J . av. -Extensive reperformance | of intérnal. contro! procedures to test their éffectiveness..
b,. Rendering: extensive analytical procedure asa substantive test procedure to test the
“- = paasonableness. of reported account balances., a hone no :
c: . Placing the test.of controls at year-end. worth of transactions. . ‘ :
de Rendering. extensive test of details of accounts balances and transactioné/events as. substantive ;
test procedures to year-end worth of account bdlances- and transactions.. ) .
b

7 Which of the following fMadered as wrap-up audit procedures with anobjective of ensuring that the auditor
“was able. fe gather sufficient and appropriate evidence to support audit ‘conclusions ?: ; . |
Adentifying. and: ‘evaluating contingencies and commitments and Performing subsequent events
procedures... 5 .5-
by: _ Assessing the.appropriateness of the client’ suse of the going concern assumption,
ntifying elated-parties and related: party transactions. ° -
oe “Obtaining Managernent letter and performing final analytical procedures a! pelt /

ge ‘When will itbeappropriate for an auditor, after ‘all avait procedures: has been rendered, to: issue 2a qualined
“apinion? hte eos ae
_ le. When there is a materialand pervasive departure from PERS. Og Re
TL When there is a-material and pérvasive scope limitation: : ; Oe N
TU. When there is a material but riot.pervasive departure: frormmPFRS oe a . :
IN: When there’ is. ‘a material but not pervasive scope limitation | : ,

OD AUDITING PROBLEMS - PREWEEK MATERIALS. - GRENEO/ ESPENTLLA)

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Vy. "When there is ani immaterial and not pervasive departure f from: ‘PFRS or "SCOPE limitation : anya ved é
“a. Land Ib,
“b. LLand Iv
c. Land U1}
5 da. Thand Vv

: PROBLEM 2: AUDIT OF THE REVENUE AND.) RECEIPT CYCLE

1... Sending accounts receivable. confirmation letters to the client’s customers is consistent, with the auditor’ s
j o objective of validating client’ s receivable assertion on?
ar Completeness and valuation .
< \Completeness.and rights
| c.. .Existence and valuation
d. . Existence ard: rights

¢ : Sey Which of the following situations would warrant the use 2 of a negative confirmation: Tetter rather. than'a ]
" confirmation letter in gathering evidence regarding a client’s-accounts receivable balance? . :
eat. Internal control risk over receivables;is at the. maximum, thus the auditor expects Witte to ne :
misstatement in accounts receivable. :
b. Accounts receivable: comprise |of few customer accounts with relatively Jarge.t balances.
c. . There were no significant exceptions: noted ‘in the prior year audit-of the same dient 'S account
. _receivable balance. .
d, ‘ All of the situations above warrant the usee of apositive confirmation letter.

A 3.
: ;
Which of ‘the following is correct statem. ent regarding the use of a negative confirmation request?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
be Negative confirmation requests are effective wher detection risk.is low.” -
ce. Unreturned negative confirination request indicate that alternative procedures are necessary.
. d. Negative confirmation request are effective when understatement in account balances are oo,
te suspected. 7 S, . Sos ‘ me de

po “What action should the‘auditors take. if. a ‘repty to.a positive confirmation |request letter for z a material amount
es is Rot received from. the. customer within two or three weeks of being sent out? :
Qualify the audit opinion ‘due to lack-of Sufficient appropriate <audit evidence «
.b Inform. the entity's internal audit department.
- Send out a’second request tothe customer: -
a. - Qualify the audit opinion due to material misstatement | in-the financial statement.

Ds Which: of the: following procedure wourd 35 aug tor hast ‘Ukely erform for. yea -end accounts: confirmations...
i when the auditor did n i cond equest? : ve :
a. Review “the cash receipt journat for: the: AMontheprrorito year-end. -
b. Intensify the study of internal control. concerning the revenue cycle.
c.. Increase the assessed level of detection risk: for-the existence. assertion:
Ld - Inspect the shipping records ‘documentirig the merchandise: sold to customers.

B y . @. Under which of the following circuinstanices would the use.of the blank from of confirmations of accounts.
: réceivable most likely be- preferable to: positive confirmation? *, ie, < :
: .a. Subsequent cash receipts are unusually difficutt to verify. Poe
b.. The recipients are likety to sign. the: confirmations without devoting |
proper attention to them.
Analytical procedures.indicate that few exceptions are expected. :
da. The combined assessed level of inherent risk and control risk is dow. :
Dd! (oe 7. Which of the following populations. should the auditor start form when testing for the completeness of: .
reported sales of.a manufacturing. company and toe ascertain that all valid-sales are appropriately billed to. -
customer. and are ultimately recordéd as sales? .
wo a. Sales receipts ~~ eo “ef : _ noe re SO
"b> Sales inveices faa Bey woo SANS OE ,
“ce. Sales-ordets : eo oS ook gas :
ad, "Goods: dispatch notes

.A , 8. Sales records or invoices: shotid be traced back te and compared “with shipping dociiments:tto: i
: a. « Ascertain that all recorded sales pertain-to- goods that are ‘aetually delivered to. customers:
bo: Esture that. shipments.to custémers: ace billed.
ce. ‘Determine whether payments are: properly applied to customer accéunts.
aS Deterine’ whether unit prices billed’ are.in accor ‘dance with sales ‘contracts. !

9... The auditor Wanits to obtain evidétice in ‘support to ‘the fi nancial statement assertion: of occurrence of salés
_. transactions and the corresponding existence. of the related receivable balance. The auditor would most likely.
do which of the:following: Substantive test procedure?
- “ ‘Trace the ‘shipping documents and sales invoices to the entry: din’the sales journal.
b Trace the approved custorner orders fo the shipping documents and. the: sales invoices.
c’. Trace the. sales invoice tothe daily sales summary.
_ Trace back journal entries ko. the sales journal to the sales invoice ‘and shipping documents.
id.
os r
10. “As part “Of. auditing: the company’ S rovenuendceipe cycle, the auditor decided t to render a sales’ ‘cut-off. by,
acing. entries several days before and after the balance sheet date: from the company’s sales Journal to the
Lt

AUDITING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENILLA)

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: source. “documents which include the sales ‘order, the sales’ invoice and the delivery receipt. Which: of the
C - : following is correct. regarding the sales cut-off procedures?
Vouching entries several days before the balance, sheet date to.the source. documents is
~,, REcessary. to. gather evidence regarding completeness assertion of receivables while vouching
“entries sevéral days after the balance sheet date to.the source documents is necessary to gather
eviderice regarding the existénce assertion of receivables, .
Vouching entries several days before and after the balance sheet date to. the source documents
~. Ig necessary to gather evidence regarding Valuation assertion: of receivables. ©
Vouching entries several: days before the balance sheet date to the source documents is”
‘Necessary to gather evidence regarding existence assertion of receivables whilé vouching entries. ‘
’ several days after thé balance sheet date to the source documents is necessary to gather
eviderice regarding the completeness assertion of recelvables: .
-Vouching éntries several days before the balance sheet date-to the source documents is
necessary! to gather evidence regarding rights assertion of receivables. while vouching: entries
Several days after the balance sheet date td the. source documents is necessary to gather
“evidence regarding the valuation assertion of receivables. ., ‘
‘
p . 11. Your audit of the accourit: receivable through analytical procedures revealed that the accounts ‘receivable - ;
" turnover'ratio: had fallen from'7.5 times to’ 4.4 times from the previous year. Which of the following isa valid
: audit insight from the said information?,
ay There might ‘have been a more liberal credit Pollicy: thus the auditor should increase sample. size
on accounts yeceivable confirmation to gather further audit evidence on accounts. receivable
existence and rights assertion.
There right: ‘have been a*more ‘stringent éfedit Pollicy thus the: auditor should gather further |
audit evidence in: support of the valuation assertion on accounts receivable.
“There might have been a more stringent credit Pollicy { thus:the auditor should increase sample
size’ on accounts receivable. confirmation to gather further ‘audit evidence on accounts tecelvable
‘existence and rights assertion :
There might have been a ‘more liberal credit Pollicy thus the auditor-should gather. further audit~
evidence’ in support of the valuation assertion on accounts receivable. : boc te

~ £2. In-gathering : evidehice régarding the valuation assertion of an audit client's accounts receivable, the auditor
5 me should inquire with the management regarding their policy of providing bad debt expense and.the
: "corresponding allowance and more importantly, gather evidence regarding the reasonableness of such policy,
Which of the following may be a possible source of evidence regarding. the reasonableness of an audit cent’ s
policy of Providing ‘bad debts? : : -
. Subsequent events: ‘happening after the balance sheet date but: before the issuance Of the
financial statements.
Historical experience of the audit client regarding writing off uncollectible accounts:
‘Ba rience of similar ‘company whitin the same industry. pk Og
. Al of the above.

D Sood The auditor wants ‘to ‘obtain eviderica in-support tothe financial ‘statement assertion of completeness of
“purchase transactions and. the cotresponding accounts payable bglance. The auditor would most t likely doo: :
which of the following ‘substantive test procedure? o
“a. Trace back,journal-entties to the’ purchases journal to the supplier's $ sales invoice’
| ‘and shipping,
documents.and-fecéiving reports.
b. Trace'the approved purchases orders to the receiving reports.
c. - Séndaccounts payable confirmation letter to a ‘sample of suppliers whose account balances,
° remain outstanding as of the. balance sheet date. * oe
d. Trate:the receiving reports to the supplier sales invoices, then to-to the entries in the purchases
: journal. : . o

# — 2. The auditor traced a sample of the, purchase orders and the related 1 receiving: reports to the purchases
journal. The purpose of this substantive test procedure is‘most likely to:
oa. Determine that purchases were properly recorded which is consisteat-with- gathering evidence in
“ support of the completeness assertion over purchases and accounts payable.
b. Test: whether the recorded purchases are for goods actually received and ordered. which is
consistent. with gathering evidence in support of the occurrence assertion over purchases and.
~ existence assertion over accounts payable.
Determine that purchases were properly recorded which is consistent with gathering ‘evidence in
support of the ‘oceurrence assertion: overr purchases and: existence assertion’ over: accounts
payable: : ‘
' Test: whether-the: recorded purchases z are for goods actually récéived and ordered which is
consistent “with: ‘gathering evidence if support of‘the completeness: ‘assertion over purchases and
. accounts payable,

h 3... AS: part of auditing the company’ Ss purchasing/disbursement. eyele, t the auditor decidedto-render & pdtchases’
‘ cut-off by tracing entries several days before and. after.the balance sheet date, December 31, from the
company’s purchases: ‘journal to the source documents, which-include the‘purchase order, the sales invoice-of
the supplier and the receiving report. Which’ of the following is correct regarding the purchases cut-off,
procedures? |
a. Decembér entries are traced back to the source. ‘documents ‘to gather evidence regarding: thie.
existence assertion over-payables; January entries are traced back to the source documents'to
- gather: evidence € regarding t the completeness .assertion over Payables.

AUDITING PROBLEMS ~-PREWEEK ‘MATERIALS ReneS ESEALLR

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D: December entries are traced back to the source ‘documents to gather evidence regarding the
-. ‘completenéss assertion over payabies; January entries. are traced back to the source documents
to gather-evidence: regarding: the existence assertion over payables.
¢... December entries..are traced back'to the source. documents to gather evidence regarding the
valuation. assertion over. payables; January entries” are traced back to the source documents to
-gather evidence regarding the existence assertion over payables.
- dv December.and Janaury.entries are traced back tothe source documents to. gather evidence *
regarding the valuation assertion over
¢ payabies. :

D 4....Which of the following procedures. would. an: auditor most likely do: to perform search: for unrecorded liabilities
and which financial statement assertion is mostty validated by the procedure?
a. Mouching: a-sample of enrries in the. purchases journal just. before. year end to the unmatched
receiving ‘report! file which is consistent in gathering evidence about the existence assertion of
‘the recorded liabilities... :
“b. Comparing a sample of purchase orders issued just after year-end with: the year-end accounts.
. payable. ‘entries’ which. is: consistent. in gathering | evidence about the completeness of the —
us -. >> pecorded liabilities.
: ae Scanning the cash: disbursements entries. recorded just after year--end for indications of unusual
transactions: which is consistent in: gathering evidence about: the existence: of the recorded’)
liabilities... :
“de Vouching a saingte of cash disbursements recorded just after yeai-end to receiving reports and
supplier's: invoices -winich. is: consistent in gathering: evidence about the: completeness of the
, recorded Habilities: bet : Ce \ .
Go a 5, Which of the following procedures is primarily a test for coripleteness of tradepayables of an entity?
: , a.. -Cireutarization/confirmation of trade payables suppliers. wo8
b. Sample .checking . of balances ‘outstanding per. the accounting -vecords ‘at the end of the
accounting: period forward to payments to suppliers: made. immediately after. the end of the
accounting period. .
co “Sample checking of payments’ to suppliers inade immediately: after the end’ of the accounting
+ batk to balances-outstanding per the accounting. records at the end: of the accounting period. _
d. A review. of ‘the “relationship: betwee reported purchase: for the accounting «period and the
reported level of trade payables balance 's Outstanding at the end of. the accounting period.

a . 6. When using confirmations: to provide evidence ‘bout the ‘completeness assertion for: accounts payable, the
~ Appropriate population mest -tikely would’be: * -
a... Amounts recorded in the accounts payable subsidiary ledger.
b. .Payees of checks drawn in.the month after the year-end.
oe : .¢. Vendors with whom the entity has previously done business with.
hie isa Seo ge “Invoices. filed, inthe entity's open: invoice files

te In auditing: ‘the accounts payable balance, ‘the: chent’s controller has provided you witha schedule listing the ~~
ae

creditors. and the amount @wed'to each at December’ 31; 2018. Which of the following audit procedures would
bé-your best choice for determining that no individual account payable has been omitted: from the schedule?
s a. Send confirmation requests to a randonily selected sample ‘of ‘treditors listed‘an-the schedule.
be) Send “confirmation requests to creditors: that are listed “on: the: schedule but not listed: ony the.
‘corresponding December'31, 2017, schedule:
cs: Examine support for selected January 2019 payments to creditors, ascertaining that those relating
to 2019 are not on the schedule ga STEN
"4 d. . Examine support for;selected January 2019 Payments to creditors, ascertaining that those relating
to 2018 are’on ‘this schedule. . .

8. Which of the following audit procedures would most likely be appropriate to gather evidence about valuation
assertion onr-the-estimated liability for warranties?
a Be ‘Inquire aboutthe company policy. iit debermining warrarity provibions and develop a separate
computation ‘of the warranties expense and estimated warranty liability based on. the policy of
‘the Company.
b.. Vouch ‘actual: warvanty- costs incurred to Supporting. documents such as repair and work orders. :
¢. °° Mouth “goods received froi customers to the original’sales: invoice: to determine whether such ~
goods beirig returned are covered by the warranty program...
dd.) Inquire about the’ company’s policy: in determining: warranty. previsions ‘and determine the.
". reasonableness. ofthe’ estimation . policy by comparing with industry experience, historical
experience and/or subsequent events, | : ~
. &y
, n

go 9. Which of the following: statements best explains why the “accuracy oF payroil calculations and payrall account» :
: “distribution is critical to auditor?|. ~
a. Payroll. impacts ‘sseveral ‘statement of¢ financial Position and statement of comprehensive income .
: accounts... .<
b. Empfoyees will complain to management if their, paychecks: do “not reflect. wages. or salaries
vearned,”
wo “cy Payroll is “paid in ‘cash, an account that is highly ‘susceptible to fraud.
~ : de Auditing: standards requi re that.tests of cash: and Payroll be coordinated.

PROBLEM 4: AUDIT OF PRODUCTION CYCLE _ oo hs

5 1. . Which of the following describes the auditor’ s role avhen attending aclient’s inventory count?
: a. To count all inventory. . oe os oN

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b. To ideritity damaged and obsolete inventory,

¢.. “To supervise the inventory counting teams. .
d. To. observe the: conduct of the inventory count, a TS

A 2. In the auditor’s. perspettive, what is. the. ideat timing of the inventory count procedures?
“a. At the-balance sheet date.
b.:. Before the balance sheet date.
te After the balance’ sheet date.
d. Several times during the period under audit.,

ey 3. Which of-the following procedures carried out at an inventory count by. an auditor. is atest oritmarily for.
v _overstatemerit of inventory? Bacau St ok gxvstene
yn" a. . Agree items that have been test-counted. to inventory sheets.
w“ “b, - Ensure completeness of sequence of pre- -numbered inventory. sheets at the conclusion of the
: count. :
% oc... Check’ that ifiventory held a’'third party” locations. is includéd in the count. “
d. Agree items appearing inthe inventory summary prepared by. the cliént: after the inventory
. fount tsto “the test counts done the by the auditor.

g . 4. Which of the following précadures carried on at on jnvento count by: an auditor isis a test t primarily for
of os overstatement of inventory? ~ BE Clu y ayashe L
a. Agree items. that have been he obits to inventory sheets.
b. Identify slow- -Tioving obsolete inventory items.
‘¢. Ensure completeness of Sequence
§ of pre- “numbered inventory sheets at the conclusion of the
count: woe
9. : Check that inventory held a third. party Jocations is includéd’in the count.

_ 5. UAN auditor selected items for test counts while observing the physical count of inventories. the. auditor then,
$ traced the tést:counts to:the'client’s inventory sting: The procedure most likely obtained evidence
. concerning management's assertion of: - ‘.
Cte, a Rights and obligation . : ee oS oe
: b. Existence - .
” c. Valuation: , ——
s dk Completeness. ea
i 6. An auditor has accounted for a sequence of inventory tags noted during the observation of the physical count
~ and is now going-to trace these to the final'compilation of the client of the inventory” count sheets. ‘This audit:
“procedure is most likely consistent with: .
‘The auditor's objective ‘of ensuring that iterns Bhystcatly present arid observed during the
2 physical’ ‘COUNT are included inthe final inventory schedule Providing ‘evidence about the ‘cHént’s®
existence and rights assertions over.the inventories, _
“$. The auditor's objective of ensuring that the items physically present and observed during the ~»
physical count are not obsolete providing evidence about the client’s valyation assertion over the.
: inventories. 6° °
1c . The-additor’s objective: of ansuring: that items physically present and observed during the
‘physical: count arecowned- by:the client providing évidence about the client's” existence and rights
2) -Sassertions over the‘inventories. £
‘d. The auditor’s objective of ensuring that iterns physically present and observed during.the ;
physical count are included in the final inventory schedule providing evidence. about the client's
completeness assertion over-the inventories.

v 7.
To.gain assurance that’ inventories appearing in. the client’ S inventory listing. schedule represent valid.
inventory, an auditor most likely would to. gather evidence about -assertion,
° a. Trace inveritory tags noted ‘during the: auditor’ s observation to items listed in receiving. reports,
-anid Vendors’ invoices; Existerice. : oe
b. Trace items’ listed in receiving reports and. vendors’ invoices to the inventory listing schedule;
: Completeness.-
c. Trace inventory tags noted during the auditor's observation to items listed in the inventory
listing schedule; Completeness,
‘d... Trace back items listed in the inventory listing schedule to Inventory tags and the auditor’s
recorded count ‘sheets; Existence.

A 8. An auditor. most likely would analyze inventory turn- over rates to obtain evidence concerning management’ $
oS assertion about: : 2
: a. Valuation : ,
: b. ” Existence and occurrence.
¢. Rights and obligation
d. Completeness: :

b 296!
Which-of the following auditing procedures most likely would provide assurance about a manufacturing
entity’ 's inventory valuation?
a. - Obtaining confirmation of inventories pledged under: joan ‘agreements. ew ant
b. . Reviewing shipping and receiving cutoff procedures for inventories. _ ela cong
{ atin
c.. Tracing‘test counts to the entity’s inventory listing. . AS
d. Testing the entity’ s computation of standard overhead rates, Conpict art

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9 oon “10. PAS 2, Inventories require that. inventories be vaiued at‘tower’ of cost or net realizable value as at the: ibatance -
- ‘sheet date. Which of the following shail be the auditor’s best source of corroborating evidence to.determine
“the reasonableness of the client’s estimate ofthe inventories’ net realizable value? ,
a. ~ Vouching client estimates to the last sales invoices for finished goods inventory sales’ and <-
, ‘supplier’s purchase invoices for raw materials purchases. :
b. - Benchmarking by comparing citent estinnates against industry’ $s current prices of similar -
-= inventories.
c. Tracing test counts noted uring the physical count of inventories to the client's: inventory,
. . :
_ . Summary.”
6 . ld Subsequent events review.

C : "24. You weree assigned to audit a merchandising client’s inventory for the period ended December 31, 2018. After.
your.complete review of the client’s. internal control over inventories, you have ascertained that the internal
controls are effective thus maintained the internal control risk at’ below the. maxinium jevel. In connéction to
this, you decided further, as-a substantive test procedure, to simply test the reasonableness of the reported
inventory balance by rendering inventory estimation using ‘the gross profit. method of creating an ‘expectation
‘of how mutch the ¢lient’s inventory balance: should be. Which of.the folowing is correct, if the auditor’s
expected balaricé using the gross profit. method is materially different from the reported balance per books as.”
a result of the physical count? .
a. The auditor-should propose to the audit client to adjust the books to. equal the result of the
~ “analytical procedure-inveniory estimation. ' :
b. - Thé auditor should issue a qualified opinion due to the material misstatement in'the inventory.
wl and indicate in the audit report the extent of the material misstatement.”
“c. The auditor should extend further the audit. procedure by rendering additional test of. details. ‘of
“ account balance and transactions to ascertain the source of the material misstatement... -
d. The auditor should propose to the audit client that an audit adjustment is necessary as a result
~_of your audit: procedure and if the client is not willing to make the necessary adjustrient,
communicate the possible implication of the material misstatement to the type of audit opinion
you will -be > issuing onthe financial statements. .

. : a :
17 : ~ 1. ‘The auditor may conclude that depreciation charges may be insufficient if he or ‘sie notes:
: a. Continuous trade-ins. of relatively new assets.
b. _ Insured values greatly in excess of book values.
c. Recurring gains on retirement of assets.
d. Excessive recurring: lossés on retired assets..’
‘

yo elo The auditor sur atthe” ‘depreciation: ‘charges may have been® ‘overstated in ‘the previous as well as ‘in
the current year. Which-of the following observations. made.is consisterit with this’ suspicion?
av The auditor has discovered through inspection of property, plant and equipment records that the
* “company has consistently incurred significant fosses | on retirement of property, plant and
5 equipment. °
b. The auditor has discovered continuous ‘trade-ins of relatively new assets.
c.. The auditor has ebserved that the carrying values of thé properties are significantly in excess of
their insured: values.
-d., ‘The auditor has discovered. through the property, plant and. equipment records that there are
many. fully depreciated assets that. are StH in. operations. . Y

i . _. 3. Which of the following techniques for collecting audit evidence is generally accepted to. be the most. efficient”
‘form ‘the perspective of. the: auditor when testing for the completeness and accuracy of ithe depreciation
' charge for the year? : :
a. Analytical procedures. / : : LS
b. . Reperformanice. - ny ee . : i
¢.. Confirmation. a mo an
a, Physical inspection.

CG: 6 AG SAS part of auditing an audit. clients’ property plant and equipment account, the auditor requested fromthe -
client a schedule of property. additions and a ‘schedule of repairs and maintenance expense during the period
under audit. Which of the following is Correct regarding the two schedules?
a. the schedule of property additions during the year is essential in gathering evidenence regarding
‘the ‘completeness assertion over PPE while the schedule of repairs and maintenance expense
account is necessary in gathering. evidence regarding the existence assertion over PPE.-
b. . The'schedule of property additions during the year is essential.in gathering evidenence regarding
“the valuation assertion over PPE while the schedule of.repairs and maintenance expense account |
ods necessary, in gathering evitience regarding the existence assertion over PPE.- .
c. . The: schedule of: property additions during the year is essential in gathering evidenence regarding
, the existence assértion over PPE: while the schedule of repairs and maintenance expense account.
: is necessary in gathering evidence regarding the completeness assertion ovér PPE...
. di. The schedule of property. additions during the year and the schedule of’ repairs. and maintenance
expense: account is necessary. in gathering evidence regarding the valuation assertion over PPE,

C. OS, In testing for unrecorded retirement of Equipment, an auditor most-likely. would a which is, ‘a test’ of ,
- assertion. on PPE.
‘a. Compare. depreciation journal ¢ entries: with similar prior year entries in search of fully depreciated
equipment; existence .

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b. Inspect items..of equipment observed during the plant tour and, ‘then trace them to the.
« ~- equipment: subsidiary ledger; completeness .
c. Select.items of equipment from the accounting records and then locate them during the plant
. tour; existence
-d, Scan,the general, journal for unusual equipment additions and excessive: debits to repairs and
> maintenance, expense; completeness

6... Which of the following ‘explanations riost likely ‘would ‘satisfy ana 1 auditor who. ‘questions management about
; significant debits to the accumulated depreciation accounts?’ :
7 ’ Plant assets. were retired during the year. :
b ’ The estimate ‘emaining useful lives of plant: assets were revised upward.-
‘depreciation expense was erroneously understated .
ode," Overhea J allocations were revised at year-end.

7. “Vouching intangible assets listed in the client's schedule ‘of intangible assets additions during tthe year ‘to the -
documentation of the:purchase of intangible ‘assets is consistent with the auditor's s objective of validating the
_. Management’ S ‘assertion of:
a. Valuation and rights.”
b.. Completeness. ‘and existénce
eo. Existence and valuation:
Sos. dg. Existence: and Tights:

8.--In auditing intangible “assets,. an‘auditor most likely’ would-réview or recomputed amortization and determine
whether | ane petiod isi redsoriable in ‘supportoof management's financial
f statement assertion of: °
~ Existence“
b. Completeness «
é° Valuation
d. Rights, and obligation 4 a ma

9. - Examining documentation of thé ‘purchase ‘of intangible assets. is consistent with the auditor's objective of:
validating-the management's assertion. of: ‘i
a. -Rights and ‘Existence. ’ bes : : bos ae
b.° Existence arid Valuation’ © * e a, a
c ‘Completeness and Existence’ Oh ates wee ‘ a
d. Rights and: Valuation’ ” &

10: The! auditor is unabie: ‘to inspect and ‘count client's investment. securities. untii after the balance sheet date, ,
Oils the Panik where the securities. are held in-a-safe-deposit box should. be asked-to:
a. Verify any differences between the contents of the box-and the balances in.the client’s Subsiaiary -
. ledger.- ~
-b.- Provide alist of securities added and removed from the box between the Balance sheet date and
“a the: ‘securities: count'date. “oe o>
-e. Count the’ Securities in the box ‘so that the auditor will have indepenitent verifi cation; -
“dy ‘Confiri that: there thas been’ no access to the: box between’ the balance sheet date and the ~
“securities: count date. we . me
11. ‘How should: the auditor: establish existence and ownership of the non-trading ‘equity securities subjected to
|
a

.- the audit? eee

: Corresponding with: the investor: company to verity the number of shares owned.
b Confirming: “the number ‘of shares owned that are held by: an independent: custodian.
“Inspecting the audited financial statements of the.investee. company.”
a. Determining that the investment is ‘carried eurrent fair market value.

12. Which of the folowing would provide the best form. of: evidence pertaining to ‘the annual valuation ofa 1 Jong- :
term investinent in which-the independent auditor's client owns a 30 percent voting interest?
‘ Audited financial statements of the investee company
& “ Market-quotations.of the investee: company ‘s shares. -
‘Current fair: valuie.of the investee company’ s assets: < ~ - 2
C a. Historical cost of the investee company’ ‘S assets Bay fos Bo

413. Which of the following. would provide. the best form of evidence pertaining to. the aniual valuation of. a
investment in preference-shares-in which the independent auditor's client’ owns.a 50 percent interest?
= Current fair value of the investee company’s assets |. .
B Historical cost of.the investee company’s assets
‘ Audited financial statements of the investee company.
: a Market quotations of the investee company’ S shares :
!

14. In_ testing long= -term investments, an- auditor: ordinarily would t use analytical procedures to.ascertain the Lo
, reasonableness of the: :
a. - Completeness of the. recorded investment. income... Oe py -
b. © Classification: between current:and noncurrent portfolios. - > oy
- €.* Valuation of marketable equity securities .- a woe
vide. Existence of. unrealized gains or tosses in the,portfolio.

T's F THE FI ANI

- di Tests concerning the granting, oF stock options, an auditor: should:

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a Trace the authorization. forthe’ transaction toa vote of the board of directors.
Be -Confirnethe transaction witirthe Secretary. S
“Nerify existence of option holders.in the entity's payroll records or stock Jedgers.
. Determine that sufficient treastiry Stock is available to. cover any new. stock issued.

AQ. The audit program forthe examination of the ret ained earnings account should include a step that requires es
_-Verification of the: |
“eva... Market value used. to-tharge: retained earings to: ‘account for a two-for-one split.
“ be Approval of the adjustment to ithe beginning balarice as a result ofa write-down. of an accounts’
., receivable. _ ‘
c. Authorization for thé. stock dividends.
id. Gain-or- toss resulting form disposition of treasury shares.

“3. ‘The auditor should ordinarily obtain evidence about: the: stockholders’ equity transactions by reviewing the
entity’ s. oe
ay Minutes of board of. directors meetings..
b.. Transfer agent's: records. :
‘cy Canceled stock certificates. :
d. Treasury shares certificate books:.,

4. The ‘auditor discovered that Romar Corporation dees not-maintain its own stock records, the auditorshould
" obtain ‘written ‘confirmation form. he transfer agent and registrar concerning: -
va. Restrictions:on payment. of the dividends. :
Be “Guarantees of ordinary shares liquidation: value.
.. The number of shares subject:to agreements. to repurchase. oe
ei - The number of share issue and outstanding. hk

5. In. ouatng the ‘ponds payable: balance, ‘the auditer: most likely would: p
- Compare interest expense with the: bonds payabie. amount “for reasonableness.
a ‘Perform analytical procedures on the bond premium amortization... .: .
¢.'. Examine documentation of assets purchased with the bond proceeds for liens. .
“ds “Confirm the: existence ‘of individual bond. holders: at year-end.

6. When-a CPA observes that the recorded interest. experise seems to. be excessive in rétation to the balance in.
"the bonds payable account, the CPA might suspect that; CPN oN
Discount oh bonds: payable-is understated -
Bonds payable: are- understated .
peges

“Bonds payable are overstatea Sg Bo oe eat

“Premium: on. bonds payable i is s overstated a ,
Cee

1. In rendering cash counts for cash ‘Ori hand, the custodians accountability may-no longer include: cee se
~ a. The‘ imprest balance of petty cash. fund, where the accountability is petty cash ‘funds. ue
ob. The ‘depositable collections: from ‘customers as of the count date, where the accountability is
- undeposited collections.
c. Any’ other money. held by ‘the custodian other than. the petty cash fund. imprest balance ‘and
" “ . depositable collectidns from customers; if tretd in tact.
d. Any other money heid. by the custodian: other than the petty cash fund imprest. balance: and
. depositable: collections. from customers, if net hetd in tact.
: > i
. can in rendering éash: counts, which of the following shall be acceptable support to theaccountability: v
‘a. Undsed postage stamps where the accountability is petty \cash fund.
/ Br Post-dated checks where the accountability is undeposited ; collections.:
- ° NSF checks where the accountabitity i is undeposited collections: Es
4 Post- dated and NSF, checks accommodated by the petty cash ‘Fane:

3: In rendering cash counts, a shortage shall be: ‘observe when: Bae

§ - The. accountability of the custodian is higher than: cash. items. .
8 “The accountability of the custadian is higher than-non-cashi items. Soe :
\ The accountability of the custodian is.higher than cash items and ‘non- cash items.
a. The accountability of the custodian is. lower, than, cash items and non-cash items.

5 8y To gather evidence regarding the deposits: in transit ina cliént= “prepared bank reconciliation statement, an
“auditor would examine .-; : .
a. Year-end: bank statement”
bs. ‘Bank confi rmation reply. :
G. General ledger vgs ap
vy od.» Cut-off bank statement, 0
5. ‘in validating the bank reconciliation statements of the ‘dient, the ‘auditor should trace back the unrecorded .
debits; like. service charges. to the: .
a - Bank statement of the current month,
P Dew Accounts. payable “voucher. .
". G., Cancelled checks returned by the bank...” .
a, » Cut-off hank statemeént.of. ine subsequent month."

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6. In validating bank reconciliation statements of the dient, the auditor should trace back outstanding checks ‘to
. the: " . .

op: 5
TES “Accounts payable voucher. Sha
Cancelled: checks returned by the bank.
Cut-off bank Statement of the subsequent month. .
ap ‘Bank statement ofthe current month. a

7. Inhis audit of the: client. cash in: bank. aecount as of and for the period ended Juve 30, 2018, the auditor.
réquested:for a cut-off bank-statement for the.15-day period ended*July 15, 2018.The purpose: of-the cut-off
“bank statement is .to gather evidence regarding the-propriety of which of the following reconciliation items as
of June 30? ~ :
"an. Deposits.in transits and unrecorded bank credits.
b. Unrecorded bank debits:and outstanding checks. .
_nrecorded: bank credits.and unrecorded bank: debits. ©
6 Deposits in transits and outstanding checks.

B.A cash shortage may be concealed by transferring funds from one. location to another or by converting
negotiable assets to cash. Because of this, which of the following is vital? .
: a. Simultaneous. verification. wey : bel
‘b. . Simuitanéous. confirmations.
<;¢. . Simultaneous bank reconciliations.‘
a. ‘Simultaneous surprise cash. count. woe
fy ‘
9. The proof of cash statements: is usually prepared by: the auditor when:
oe a. Internal control Over. cash is strong and control risk iis placed; at. the maximum.
b..° Cash balance is very ‘significant: :
“.¢c.:. Cash balance is. very. insignificant: : : :
d. Internal control over cash is weak and control risk is: place at the maximuth.

‘10. Which of the following is @ test of controls.over cash? : . os

a. The financial accountant reviews the monthly bank reconciliation statement. -
b.~-Petty cash is kept ih a locked tin.in the safe.
c. - Cash and chécks are safeguarded against:loss or theft.
4. Post-opening procedures are observed. — ,
ed ‘

“PROBLEM 8: Al CASH
You were assigned teto render a cash count of Markat Corporation’: s petty ‘cash fund with | an imprest balance of
7 P40,000.. ca gees Sh .

The custodian presented tp you the following: : moat. : ce “ .

“Currencies and coins i . 12/540
A disbursement check payable to the custodian. “24°35,600 9
An officer's personal check accommodated by the fund a ‘4,000,
Manager's $s check marked NSF : a 2,000
Petty: cash. expense vouchers: : Ste :
. : 12/20°Transportation “>= oe : : * 1,500
"12/24 Office repairs ~ wo Cte me 900
12/27 Miscellaneous ; : 7 ~ 2,100
“Unused postage stamps. ©“ : : ‘ “BOO
An’‘enveloped marked “collections for charity” with list of
names.and corresponding amounts contributed. There? is ae
“ne money inside the envelope. - oe a -ou 5 2,500
What is the petty cash shortage « as of December 31, 2018? ea Bo , mt s
CBD 38600 c.° “3,360
“1,360 Of od. 5,860

JDIT.OF CASH
You were: aasigned ‘to audit the financial: statement of Jade Corp.:on January 15, 2019, forthe year ended
December 31, 2018. The. general ledger shows. cash-account balance of P726,600 as at December 31, 2018.

The bank reconcitiation prepared by the client's cashier included the following items:
Cash per records, Decembér 31, 2018. Ope 9726:800:
Cash per bank statement, December 31, 2018 i / . 792,285
* Note receivable collection. by: ‘the bank: in: December, recorded i in the books wt o
in January 3. : o 39,000
Bank: sérvice charge for December, recorded in books irin January. 3 i : 5,000
ae Outstanding: checks, ineluding.P11,900 disbursement check certified by © 87,875
“the bank : : oe
‘Check of Jude Corp.,. charged by the bank in error. on December 28, 2018; : .
corrected by the bank.on January 2,.2019° 2,250
Deposit inin transit, including:PS: 7200. customer.= eallection check marked NSF : 15,700

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From January 2, 2019, to “January 15, 2019, ihe ‘date | of your cash count, total cash receipts appearing in the: ,
‘cash records amounted to.P180,500- ‘During the same period, deposits clearing the bank amounted to P143, 895.
The following cash and. cash items were on hand at the ciose of business on January 15,2019:
Currency. - : P4,275
io. 2 = Gustomets, checks. . iia, fetes s 8 ,B50-
a oe Expense 1 vouchers: : Adgs

‘wudit notes: .
a. Cash collections from:accounts receivable ware erroneously recorded by the company 2as follows!
. “Pate. eas ¢ : . .
7{O05/18" Allowance for bad rebts. . “12,000 :
oe x “ACCOUNTS receivable’: BE ES - Sg pes 12,000” :
6 12/10/38 : “Anventory risa 9,000 :
: 6s Accour.ts receivable : : ” ~ §,000:
12/15/18 me Bad debtiexpense. © ep) 0 ba 10,500. ~
Accounts receivabie i
S a Sas 10, 500.

i ob Check deposi on January. 5;2019, _amounting to Pe, 600.was not recorded in the books.

c. Undeposited collections c onn January 10, 2019 amounting tcto0 P13, 1500 was also not tscorded in the books.
;

Requirements: Ps
Wh tis the. correct gash: in bank balance as of Deceriber 31, 2018?
729,060: ~ ee 778,240 t
b. 773,110 : men 726,810. ~
“What is the net: adjustment’ to cash as of December 31; 2018? 7
: pan. > 46/500--: oe Ee 4a 040- S
6 Obes 2,460 : ea 620
: “What i is the cash shortage as: ‘of December 3i, 2018?
a 2,4606 008 e ee 44,040, :
o & 46,500 : oO @L 4/620 ¢
What-.is the total cash stiottaae' as of January 15, 2019? es
Cae) - B1,645°°"~ _ Pel 4 ,040__
b.. 37,605 | eee de 4,626

‘ . 4
PROBLEM. 10: AUDIT OF ‘CASH
You are auditing the cash account of Carrera Inc. for the: fiscal year ended July 31, 2018. The client fhas not ,
: prepared. the duly. 31, ‘bank veconeiiation.: The© following information were made. available: Oe

ce ag el : ee e wo General Ledger Bank Statement lp te

Py es Beginning balances: a " P140/330 0. PEF 2,590 eee
~ Deposits ae te Ta »°751,680. 0 2 -
Cash receipts journal 3." 763,680 foe SoS we
"> Checks clearitig the bank” SL a “= (708,4507 :
“Cash disbursements jeumnal "°° (654,330) : :
July bank Service charge’ os we Te (2,680).
Note paid by! fhe bank” : : ae Oa (183, 000)
NSF check an “4 (9330)
Ending balances 9 P289,080 eps. + 20,880

- Audit notes: 2 re ‘ .
a. Bank reconciliation’ in june 2 included the followirig information: Bank. statement balance, june, P172, 590;
“Deposits in transit, /P18,000; Outstanding checks: P52, 260, and; ‘Balance:per general ledger, June,
“P140, 330.

b. Checks clearing the bank in duly, outstandingby the, end-of June was 5 at P50, 760.

Ge. ‘Checks. clearing the bank. in July and were recorded in the July cash ‘disbursement journal was at P614; 010. a

a ae check. for: P31, B00: ‘cleared the bank, but had not, béen recorded in.the cash: disbursement journal: it was
for a payment of an accounts payable. :

a) check for Ptt, 880 v was erroneously charged by the bank te Carrera inc.

f Deposits. included. P18,00 from June and 2733 680 from July.

: gy The | bank charged Carrera: Ing. $ account:-for.a: non-sufficient:furid check totaling to’ P9,330. The: credit : ,
_ ‘managel concluded ‘that; the customer: intentionally. closed its- ‘aogount rand the. owner teft the ety, The coe
“ae cheek:-was turned’ over to.a; collection agency. 758 oy : Ss :

hi A note for PETS 800) plus interest, was. > paid: aiecty by the bank under an’agreement signed four months
ago. 8 ne : .

Required: Based on your ‘audit procedures and Appreciation of the above data, “answer the following:
1. How much is the total outstandirig checks as. of duly: 312 :
“a. 32,490 Pie ws 129, 940.

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 RgSA: The Review School of Accountancy Page 1B Of 29
b. 41,820. - ' -:* d..10,020
2. .How much is the deposit in transit as of July 31?
: ae 20,940. . : c, 18,000 |
i b.. 30,000: : eo Gd. 27,330
3. What i is the correct.cash in bank balance as of July 31?
a. 32,820. oA c.. 20,940
“be 1, 160 fast ‘d.9,060°
4A, How much is. the eash-in bank shortage as of June 31? oe
a, 2,200”. : ec. 2,000
boo 1 7200: i a a GG None

PROBL’ 11: Al DIT. ASH/AC RUA

In‘line with your audit of Burberry Corporation fcfor the perfor! ended December 34, 2018, your audit staff provided -
you. the following. audit notes: : ) y ,

Audit notes:
a. Accounts receivables from customers increased during the year by Pa, 200,000. “Total discounts taken by
customers was at P'1,580,000 while total sales returns which included the customer refunds was at
P2,420,000. . wl

“The allowance for bad debts. increase during the year by P840, 000. ‘During the ‘year, “the company wrote-
off Pt, 120, 000 in bad debts. While recovery of previous write- Off (included in-the.cash collections from..
: customers) was at P420, 000. :

Advances from customers decreased -during the year by P1i,900; 000.

“Accounts: payable to suppliers increased during the year by. P3, 780, 000. Total discounts taken. by the .
“ ;company. for purchases: was at'P1,290,000. while total purchase returns which included the supplier
refunds was at P1,960,000.

Advances to suppliers increased ‘during the year by Pi 1512,000..

: ‘Tnventories increased during the year by P2,690,000..

The equipment account increased. by 2, 000, 000 during the year while carrying value of the equipment.
sold during the year was. at Pl,600, 000. . ;

D The accumulated depreciation account increased by P1,; 000, 000 during | the’ year.

the following, been y's nt its cash records:

to ~ 24
of. : aos

for

Cash: refunds’
Cash

Rea ui, ments: s

ene is the accrisal basis grosssales? , we
Ca 55, 750,000." ~ . 7 5 ¢. =» 56,170,000
EO 55,000,000 # d. 56,580,000
fo
x What is the accrual basis gross purchases? “ :
a. .31,520,000 o. c,. 30,880,000... .- : Sond
”
b.°.30,008,000 0s - @ 29,368,000 ms . mo
Ls What is the accrual basis cost of sales? Pes : oe Fe
a. 24,068,000... CF 23,428,000
b... 24,940,000 — hes . d.- 25,580,000.
What is the:correct. bad debt expense for the year? me
Cary 1,540,000” : 1,960,000
Br 700,000 6 é. 140,000
~aWhat is. the correct depreciation expense? . : es
oe+a 2,400,000© ; . ce. “1,600,000
ye 2,000, 000 oe e 1,406,000 :

Pp iM 2: A DIT OF f H
. Ford .Corp. uses the. direct "method to. prepare. its statement of Gash: fos. Ford Corp.’s trial balances at:
December 31, 2018 and 2017 are as follows: ren oa woe
_ cae, 12/34/ 12/31/17
Debits nee “ ea wo
Cash. oe . ° _ P 35,000. - P.32,000
Accounts receivable > 33,0600 30,000
Inventory | Noise ee '31,000 . 47,600

AUDITING PROBLEMS — PREWEEK MATERIALS (IRENEO/ ESPENILLA) , : 7 0 2

 ReSA: ‘The Review School of Accountancy «| Ee . _, Page 14 of 29

12/34/18’ 2 12/8147 PO es
Property, plant& equipment ~~" 100,000 95,000
Unamortized bond discount: -- 4,500: ~ §,000
, Cost of geods sold. — < 250,000. - 380,000
oN Selling expenses : wo 141,500 172,000.
General and administrative ae *
expenses. . cog fe 8 137,000 154,300
Anterest expense |, ee 4,300... .2,600°.-
~ Income tax expense. 20,400- 61,200
“ co PT36,200 or
: Credits : a
5 Allowance for uncollectible ‘ oo : an
caecounts : i =P. 4,300 _P 1,100'
. Accumulated ‘depreciation . 16,500 15,000 -°
°- Frade-accounts payable, eo 25,000 17,500
Income taxes payable — oe 5 24,000_ 27,100
Deferred tax liability: oe “5,300 s. 4,600 . ‘
a Co os 8% ‘callable bonds payable: Sy 45,000... 20,000
PG oe se Share Capital : , $0,000. | 49,000-
- oss. Share premium - ei 9,100. 7,500
Lt . ooo et Retained earings 44,700,: > -64,600
‘Sales; woos ..538,800 778,700

° Ford purchased F PS, 000 in cauipmet during 2018. ‘

'

. Ford’‘allocated one-third oF its: depreciation éxpensé ‘to selling expensés and the’ remainder to: ‘general and
" administrative’ experises.. .

QUESTIONS: | 3
Based on the foregoing, what’ amounts shout. Ford: “Com. 's report: in its statement ‘of cash flows for. the year *
ended December 31, 2018 for: . ,
a
Cash collected from: eustomers? :
*" a. 536,600 ssc god “ ak aves
b. 541,600 eG 541,800 : se ‘
2. Cash paid for. goods to. be sold? “ Oe es nee Mees : ‘
cl #. FBP. 226,500 Se. 242,500 ane
2b, 257,/S00.0 8. oe . “ d.. 258,500... of
gB 3. cash paid for interest? .: : . /
/ 4,800 age Ag Myce soles 3, 800:-; Baa ¥ : oy . os ee . ,
* Ce 4300° seh SERBS Seago eg Re sade eed na St he
4,° Cash paid for itincome taxes? fe BPs 2 . : :
“ae 20400005 Cc. 19;700
fBS,25,800-.0 0 d..15,000°.~
a “Gash paidfor ‘selling: expenses? CRE
“ae 140,000: : es 142,060. & wk Ce es .
8 b.. t41,500- eo eof Ge) ¥44j0000 20: ae a 5

An analysis of incompiete records of Journey: Corporation produced the following iiformation. applicable to 2018:
. ACCOUNT. INCREASES - le ; g
Nae ss Cash 2. 2 os 4,200,000 ° .
Accounts receivable : “ss 4,400,000 oe ann
fee Accounts payable SE ~ 400,000). ° ve
ACCOUNT DECREASES DREN sete. Ga Ory aid Me
Inventory... - eae. 2 1,000,000, . * : oS
Notes receivable. ' ae 660,000 “

Summary of cash transactions were as follows: : 7 -

~ RECEIPTS: , ey ee
i. Cash sales : mo a 3,000,000:
oe . «Collections on accounts receivable La ~ « 30,000,000.
Tees Collections on,notes receivable, OO ES . » 2,400,000
», Anterest.on notes receivable. : aoe 200,000 > . «°
> ° “Purchase returns and_ allowances - 500,000 :,
. DISBURSEMENTS: : Ce 2
: _ Cash purchases _ ' ok . 1,000,000 °
hos ld Payments on accounts payable : 00000! ‘ 2. 46,500,000
Sales returns and allowances cobs ed . 400,000.

~ Additional information: o ‘ Moss Bg

a. -Total purchase returns and: allowances amounted to: P80, 000 : : : ‘
b. ‘Total sales returns and allowances amounted to P1,200,000: ‘ haps :

x
‘AUDITING PROBLEMS - PREWEEK MATERIALS (IRENEO/ESPENILLA)
 R@SA: The Review School of Accountancy Page 15 of 29

yw What is the accrual basis Net Sales?

“a, 37,000,000. 5 “g. 36,600,0000
© b, 36,200,000 tn +, 35,800,000

PRI M.14: AUDIT OF CAS H:ACCRUAI

You are. auditing ‘the financial statements of Clarke. Co. for. the year. ended: December 31, 2018. Clarke” Co:
maintains records under cash basis: and only keeps records of its cash_receipt and cash disbursements.: As: part of
your. audit, you were requested to convert the records to the. accrual. basis.

“You were able'to gather the following information:

; Dec. 31, Dec. 31,
2017 2018
. Outstanding ‘sales invoices P536,000 P835,000
- Advance collections from customers . 0 125,000
“Unpaid merchandise invoices | . ~ 544,000 423,000
Axivance payments to suppliers 98,000 «7. 0
The cash receipt and disbursement fecords revealed the following information:
¢. Amount collected. from customers, P9,890,000
“Total payments. to ‘suppliers of merchandise, P5,615,000

of Z what | is the total sales for 2018 under accrual basis}.

a." 10,013,000 4 > 10,064,000
b..- 9,716,000- 10,189,000

You are auditing the Accounts. Receivable of Generosity Inc. as of December ; 31, 2018. The general journal
reported Accounts. receivable. balance of PL, 520, 000. which was. net of the unadjusted allowarice for bad debts
: expense amounting to P46,720.

The accounts receivable subsidiary ledger had the following details:

Customer Invoice date Amount Balance.’ .
~ Y ‘ ‘ Grace Inc. 9/12/2018 © _-P139,200 Pi39,200
: eo. Fruth Corp. 12/12/2018 153,600. ~
i , :
12/02/2018 99,200: — 252,800
Gusta’ Co. 11/17/2018 185,120
“ an 10/08/2018. : s h 76y0008>" 362,120se
- National Co. : (12/08/2018 “:160;000:
. “10/25/2018 144,800
a 8/20/2018 40,006... 344,800:
-.. Nano Inc. |... 9/27/2018 «96,000. 96,000. -
Bruce Inc. . » 8/20/2018 - 71,360 71,360
Privacy Corp. 12/06/2018 112,000 .
11/29/2018: 469,440 _ 281,440
Fotal.- L PL SA6,720
x
“Additional information:
i
a. . You discovered based on your. review. of subsequent events that Bruce Inc, recently went bankrupt,
thus: your suggested that the amount receivable. from the s same shall. be written off,.

bw Based c on-an: accounts receivable confi rmation teply’ from. National Co., you discovered that sales ©
invaice dated 10/25/2018 was. erroneously invoiced. at P144.80 per unit of the merchandise sold to
‘the. company, the correct invoice price should have 2b en P114.80 per. unit.
ae ay
i c. -You-also discovered that the invoice dated.10/25/2048 has already been settled by Truth Corp. per
OR number 34675, This-amount however has been erroneously posted against Gusto Co. Subsidiary
ledger. asa settlement for an invoice dated. 11/05/2018 for the same amount.

- dd, 5 The estimated ‘bad debt rates below are based on the company’ s receivable collection experience:
us a Age of accounts % of Collectibility
noes a hee O30 days. 5. : . 98% .
Be “31 -60'days ~~ _ 95%
61-— 90 days ' : 90%
-91 ~ 120 days : 80%.
2 Ower 120 days _ : 50%
equired: . . ‘
‘What is.the correct allowance: for bad debt expense for the year ended December 31, 2018?
‘a. 117,344 : ce... 124,344. —
b. . 130, 320 0 ; (8D 127,320...
Semen”
2. Sf ‘Assurning that there were no other entries to. the allowance for doubetut accounts, what is the correct bad
é debt expense for the year?
Bs. 80,600 c. 154,960 _ a}
b.! 151,960. - d. 148,984
 Reba The Review School of Aexiunitancy ek “page 16- of 29

: z What it the carrying value of the company’s “accounts receivable as of, December: 31, 20182. :
ab eo ‘ bae, 1,318,040 G 4,321,016 :
A, 345, 540 @. 1,315; 040
.
What is the necessary adjusting entry to adjust any “unllocated’ difference between the St.and GL? |
‘a... Bad debt expense: 20,000 _
Le Accounts receivable 20,000
Be Sales... : 26,600 _
eS Accounts receivable ; ~, 20,006..;
c:. ~~’ Accounts receivable. 20,000.
Other income - * 20,000 i 8
ad... No necessary. entry :

BLEM 16: TOF TRADE RECEIVABLES

You were assigned | to audit. the existence assertion. of lackson Inc.’ $s receivabies as of December 31, 2018. You:
have decided to send, confirmation letters. to pre-selected1 customers. The ‘folfowing is a summary ‘of the
confirmation replies of client customers: where you noted audit. exceptions. ‘Gross: profit on Sales is at 30% and
inventory records are kept under the perpetual. inventory method. ee .

Customer . ] “Balance per Books Customer's ‘Comments _ . Audit fi ndings. :

Asul Inc. P30,000. Your Credit: Memo No. 0978: ‘| The Credit Memo was taken up
. : “ representing price adjustment. » 1 by Jackson Inc. in January 2029.
dated December 29, 2018 cancels be ca Po as
: cay . : ; bo Me this. of Des eo
Bughao Corp... — P300,000 P140,000 was for Sales Invoice No. | Returned goods were received on
on : : : 1190-.were for goods returned on. . . December.31,2018. Credit
: ‘Pecember 30, 2018. Correct. Memo No, 1256 were issued and
e vi balance is P160,000. ‘recorded on January 5,.2019°
T\Kulay Co: © P288,000 This ig for outstanding sales The customer complaint is valid, of:
ae ae invoice
No. 1280 which shauid pk ,
‘have been priced.at P122 per unit.
You erroneously billed us P14d: per
e unit: +. eo gd
Dilaw Inc. | P265,000- ° Our records Show @ correct: balance | JacksonInc. recorded the.
: of P220,000. The difference is for transaction as a purchase by:
Sales Invoice.No.. 1109 which were | crediting accounts payable. The
fer goods delivered to us but were related inventories were oe
sg | subsequently returned to: {yous appropriately takenin-the ee
, because. the goods. were. with perpetual records. .
, . Dew Ss: wrong:specitications.
Endigo Corp: - P122,000 wee This is ‘for. Sales Invoice No. 7341. The goods were,
| S delivered on:
o
: s We. Haceived the corresponding ‘December 30, 2018 under term.:
goods. ony on January. 8. , FOB shipping Point, : as

‘Requirements: ‘ ~
ti What is. the effect to the-net income, .if there are any, as a result of the customer’ s Au Inc. reply? :
cos (ah Decrease by P30;000:. . :
. Increase by P30; 0G.
* Déerdase by P9,000°
a No effect. ‘
~ Whati is the effect to the net income, ifF there are any. as a result of the customer: ‘S Bughiao Corp." s reply?
‘sea. Decrease by P160,000 "~ . a
rb. Decrease by P140;000
ic.” Decrease by'P42, ago
.- No effect. :
The accounts receivable from Kulay Co.-is:
7 oa” Overstated by P244;000-
“bu. Understated by P44,000
. ‘c..: Overstated by pad, 000 :
i de Correct“. : =
What is.opie effect to the’ net income, if there. are any, as a result of the ‘customer’ ‘S Dilaw Inc. reply?
~ Decrease by P45,000- :
6. Increase by P45; 000. : as a a aan mo ~
"Decrease by P13,5C0 se rn eS ,
>No effect.
:& The acéaunts receivable from: Endigo Corp: ist
# Correct: .
. “Be Overstated by P122: 000"
’ 6: Understated by 122,000° : pO BERET rs
a. Overstated byeP36, 600. Do GE J ESI sO ns Ss a Be

. PROBLEM 47: AUDIT.OF LOANS RECEIVABLE fea! ANCING :

-ABC Co., a financing company,extended aloan to XYZ:Corp. amounting to: PiOM on: January. 1, 2015 receivable 5
years - after.. The loan bears. 10% annual interest collechble: at the end of each ‘year, starting December 31, 2015:

AUDITING PROBLEMS — PREWEEK MATERIALS Tash etbencon

 y°

“ReSA: The Review School of Accountancy Aen Dae » Page’ 47 of 29

The company paid direct origination cost amounting to P300, 000 and charged XYZ corp. origiriation fees at
PI, 020, 955. The yield on the loan under this arrangement v was at 12%.

The 2015 to 2017 interests were collected as scheduled.

By the end of 2018, due to financial diffi culties being experienced by XYZ, XYZ failed to pay the annual interest
“as scheduled and ABC Co.-is doubtful as to the coltectibility of the remaining interests and the principal.

After due consideration and correspondence with XYZ company, ‘ABC estimated that it: will be able to recover the _
following amounts at respective estimated dates: 3
~ Amount. ‘ Expected recovery date.’
-<P4,000,000 coe Décermnber 31; 2019
.-2,000,000- > December 31, 2020
2,500,000. December 31, 2021
2,500,000 . os December 31, 2022

‘Required:
i What is the. carrying value of the loans nena as of December 31, 2018, before impairment?
# a..9,519,634 bs 9,392,530 19, 821, 429 d, iM 661, 990

o af How much is impairment loss qn the receivables. (including interest receivable) as. of Dec. 31, 2018?
fa. 4,806,499 “ b, 6,344,509 («4965938 a 6,B55,491"
ve & What is the correct nét book value ‘of the recaly jables as of December 31, 2018?
é a. 6; 855, 491 b. 6,344,509 cy +5, 855, 49% od. 5, 344,509

uy Assuming that in December 31, 2019, amounts were received as estimated, what is the balance of the
‘receivables as of December 31, 2019? :
a. 4,225,128 \B) 5,558,150 |. c. 2,232,143 ~ d. 2,500, 680
‘Assuming that in December'31, 2020, amounts were received as estimated, what is the cofrect interest :
income to be’ recognized in 20202 oY :
a. 267,857 “b.°702,659 ¢. 307, 015° { d.) 666,978 | -
ee

PROBLEM 18: AUbIT OF LOANS RECEIVABLES (FINANCING) oS

In the course of your: audit of the Loans receivable account of ABC Financing’ Corp, a ‘lending company, ‘for the
‘year énded December. 31,: 2018, you discovered the balance per the general ledger ofits Loans receivable from
DEE | Corp. at PS; 900, 000.
Be ve‘g 5 - . .
Audit’ notes:
a. “The loan. bears a an ‘annual i interest at 10% collectible. semi-annually every December 31.
'-
ob. The loan has a three-year term and was made on January 1,:2017-when the prevailing rate of
Jinterest-was at 12%,
c The company recorded the loan ‘asa debit-to the ioars receivable account -at the face value of
the joan ‘charging any difference between the toaned amount and the: face value of the loan to
interest income.
Semi-annual®:interest collection on the loan every June 30 ‘and: December 31 has been ces .
_ appropriately recorded.

we What is-the total amount extended to DEF on January 1, 2017 and the outstanding: balance of.the loan.as of
_ December:31, 2018. . © a . ~
.a. 4,826,745 and 4, 952, 830 eo © /4,754,134 and 4,908,330
|b. 4,789,382 and 4,866,349 - tos . 5,000,000 and 5, 000,000~
,

In the course Of your audit of the Loans receivable account of XYZ. Financing Corp, a. lendirig company, ‘for the.
year. ended. December 31; 2018, you discovered the balance per. its general ledger ofits Loans” receivable from
_ KLM was at P4,000, 000. weeks :

Audit notes:'. -
The loan to KLM is a non interest bearing loan which: shallmature on December 31, 2020.
ope

. The loan was originated on January 1,.2016.

The total amount disbursed: on that date was based on the appropriate discount rate prevailing
-. on-that date at 10%.
‘The transaction was recorded by the client as a-debit to loans receivable at face value of the loan
“charging interest:income for its difference to.the amount: credited to cash.

What is the. retroactive, adjustment to retained earnings, if any, asa result of your audit of loans réceivable from
- KLM?
“BL :994,741 debit , “-¢: 521,574 debit
A. 2,267,946 debit - . , d. no:0 adjustment nécessary
~

EM 20: AUI : TRA E RECE SAND INVENTORIE

2

- AUDITING PROBLEMS ~ PREWEEK MATERIALS (IRENEO/ESPENILLA)

: ReSA The ReviewSchool of Accountancy ee Page 180f29
You were assigned to: audit.the receivables of Chart eston Merchandising ‘Company. AS instructed: by your audit
“manager, you Have performed. a ‘cut-off test of sales. ‘The results:of the cut-off test revealed the following:

Recorded as ‘Sales in Decerhber 2018.

Seting Price cere Cost: Terms >: Shipirient Receiveld by Le
© Date Ae Customers
vo P18,000 -P16,500° FOB shipping point 12/26/2018... 12/29/2018 ©
af» 20,000. ~ £4,000: Shipped to consignee 12/26/2018 12/29/2018 :
8,680. 7,246 FOB destination 12/28/2018 01/02/2019)1/1 “y ras
w |. $9,000- “2,500. FOB: shippirig’ point “12/30/2018 ° 01/02/2019. Y
"10,060. ‘7,750 “FOB destination’ 12/31/2018 01/03/2019
”, 7,800. 6,100 ‘FOB shipping point | -12/31/2018 01/62/2019 \"
* 414, Gog jong “Az, 008. Shipped
t4 consignee 12/31/2018" 01702/2019~

Recorded’ ‘Sales in January 2019.

Selling price — ~- - €ost Terms “Shipment. "Received by ~
Lo ; i .. Dates customers.
oy -P24,000 P18,200 . FOB shipping point 12/30/2018 -. 01/03/2019
0,500 8,800 FOB: shipping:point "42/31/2018 © ~ 01/03/2019
4,500 ohne
: FOB destination 91/02/2619: 01/03/2019
"6, 500.” 735,000 © FOB: ‘shipping: point § : 01/02/2019 _ : 91/05/2013

‘A count of all inventories within the premises was made on December 30, 2018. ‘The total cost of the count was
recorded as inventories as of December 30, 2018. -Haif of the gocds shipped to ‘consignee on December 26 are.
still unsold:at. December 31. The agreed commission on consignment sales i is 20% of the sales price.

- The :unacusted ledger balances. sh 19w the following:

. Accounts receivables . "P376;500
_° Inventories 525,000 —.
“Sales, “4,520,000
Rost: of sales i 942000.
Determine the adjusted Balances of the following:
Re Be ee oD
a “Accounts receivable : 363,320 329,620. 361,120 389,320_-
2, Inventories: ~ 506,800 5243407. 547,440: 549/500
2 Sales 6 4,522,320. 1,504,620 1,508,820.
4° 1,551,500 ~
. Cest- of‘sales 973,560. 928,366 917,500 °, °°’ 942,660

: PROBLEM 21: AUDIT OF INVENTORIES ©

Having been ‘engaged by Portent Corporation to aud its financial Statements for the period ended December 31,
2018-on February 2;'2019,-you were uriable to observe the physical count of the client inventory conducted ofv. :
December 31, 2018 i in all of the entity’s warehouses. Based.on your preliminary understanding of the-client:
iriternal control over inventories and as @ result of your test: of controis you have ascertained that the control. risk
over inventories is “at below the maximum level thus you simply decidéd to. test the reasonableness of the client
inventory balance’ through ‘analytical procedure- invehtory estimation. ‘The. following infermation were made.’
avallablé asa result of your decision:
s
ye
Cast! Retail Price
> Inventory, January 1 1,698,735.) 2;516,130. °
Purchases v 13,901,265 21,600,000.,
Freight-in: : 702,000. 2 ee
"Purchase discount 1,684,800" =
Purchase returns and allowances 1,123,200. 1,728,000 - |
ae Departmental transfer in 2,808,000... 4,320,000-
~ Departmental transfer out 1,584,800.. 2,592,000
© “Mark-up =. “2, 37520,000
-Mark-down | 2,106,000 as
Mark-up cancellation 1,053,000 . ae
Mark-down cancellation 365,058 ne
Sales | “48,630,000, s
Sales. discount to customers 9,490,400 o os
“Sales ‘discounts to- employees: - : 745,200
Sales: returns and allowances * 2,235,600: \
© Normal spoilagés eo 217,800
Abnormat Spoilages _ 493, B12 894,240 °°
The inventory. as a resutt of the said: count amounted to, P2,811,6 690:

Requirements: : :
we What is the estimated inventory as ‘of December 31, 20 18 at retail price as a result of.the analytical
procedure? L
5,680, 548. “e.4,645,950.0
 ReSA: The Review School of Accountancy “Page 19 of 29°
b. 6,574, 788 : d. 7, 170, 948 :
‘What is.the inventory shortage as a result of your analytical procedures assuming tha the ‘company uses
££ or conservative cost method? .
312,612 : , c. (369,417
e 804,933.. : : ‘d. 539,832 :
£ What is: the inventory shortage as a result ‘of your analytical procedures assuming tha the company uses
: the average cost method?- wo,
a, 1,058,487 ‘ -., @ 596,637
obs 539, ‘832 Lor : dy + 312,612 :
A What is the inventory shortage asa 2 result of your analytical procedures assuming tha the. ‘company uses
é the FIFO ‘retail cost method? oe
426,222 : c.. 539,832
d. 381,225
jer

PROBLEM 22: aupit OF JHVENTORIES

. i

Gloria Corporation uses the lower of cost or net realizable value inventory: Data regarding the company’s
inventories ‘are as’ follows:

The general: ledgers showed the following balances:

‘Cost:-“. Finished goods ~"Pt,520,000-
2 Work-in-process - ~ 748,000
Raw materials u 2,875,000
Allowance: Finished goods’ =~ ‘ (10,000) -
: ‘Raw materials _ : hs (40, 000)

The following information were further furnished to you by. the dient: * a :
Finished:Goods Item_M . Item P - ItemQ
Cost» ~ , : P550,000 _ _P540,000 P430,000-
Selling price : oes 675,000 -620,000°°° |: 820,000:
" Estimated cost to sell, as % of sales a 20% 15% ' 15%
: Lh Work-in-process Boe en Pe
Cost of! raw materials to date a P120,000°. - P88,000 -P200,000° -
“Cost of direct labor to date’ : Ry 70,000 _. 60,000. - - 80,000.
_. Cost.of factory:overhead to date Loe 50,000.-” 40,000 .40,000
Selling price upon: completion eo : ‘360,000 ~~ -.289,/000 735,000
Estimated cost to complete . . . 48,000 97,650 74,000.
: Replacement’ cost= Ses ws 20870006 8 168,000." 375,000
-Normal profit margin as %. of selling price
{ . . 25%: 35% : 40%

Raw Materials - Item.M_ : Awe UB ‘ Cc .

Cost a : us P250,000*- » »P560,000 - P400,000 os
Current purchase price. : coe 2 250,000 480,000... ° 375, 000

Raw Materials ~ Item.P es ). Yok a

Cost : Bn Bee NS oe P4Q0,0065 ~ b300;000 “-"P200,000
Current purchase price. i oc, 450,000 ~ 275,000 - 180,000

‘Raw Materials - Item 0 Oy Ca Bees yes Bee

Cost P375,000. P450,000
Current purchase price a _ 395,000 420, 000
Required: *..~
of What iis. ‘the correct Finished goods mnventory to bee reported in the statement of financial position as
z of.
December 31? . :
a. -1,466,00.. |. o Xe. OL A9?; 000 ’
b..... 1,530,750... : 1,520,000 -
“What | is the correct Work-in- process inventory. to-be reported in the statement of financial position as-of
December 31?
2 748,000 ¢.. 650,200
b. 746,420 = dai 708,000 ~ . : :
y What is the correct total raw materials to-be reported in the statement of financial position as-of.
December 31? <2 we ES
a.~ 2,765,000 . C 2,785,000
b.. - 2,875, 000° : od 2, 775,000

b 4. What i is the total loss on inventory write- down to be reported for the period?
e / 153,000 ts. » 143,000
“S.113,000 an -d.-- 103,000

P LEM 23: AUD: DE P,

ABC Corporation, meat processing company, reported| the following balarices on the Hability Portion of its |
Statement of Financial Position as of December 31, 2018:
Current Liabilities, ‘ :

AUDITING PROBLEMS. - PREWEEK MATERIALS. (IRENEO/ESPENILLA)

5 ReSA: The Review School of Accountancy ae Page 20: 0f 29°

“accounts payable
- trade. 0 0” ~ PY;250,000 nos "y
Estimated Premiums Liability ' 7 2.
Accrued Compensated Absences oe ws 360,000 ©
Deferred Tax Liability Oe ge 124,000 -
- Additional information: eee .
a. The result of your purchases cut-off revealed the following resuits:
December, 2018 Purchase Journal Entries: .
Receiving. |. Invoice Receiving Amount? ° Remarks
Report Number .: date/Shipment riyp report gate , : :
: date. ‘ : oon co
100294 oy [42/26 __f.2/23 2. P20,000 | FOB Destination
100295 = 42/22 | 42/26 | _ ~| 50,000 FOB Destination
| 100296 - 112/27 A e/3O 70,000". - | -On Consignment.
£00297, 12/28 pfee 55,000... - | FOB:Shipping Point
100298 12/29 - 4/3 | 60,000. _ 4 FOB Destination
100299. | |.12/30" op af4 <_* FF 80,000 FOB Shipping point
January, 2018 Purchase Journal Entries. ae ,
| Receiving... | Invoice |. | Receiving... , Amount. | +. Remarks
| Report Number. |. date/Shipment report-date ‘ : So

A 100300.) 42/29 Z Biz : P40,000-- | FOB Destination o

100301... 12/308. 3+ . 1/4. “eked aS 50,000 . > |: FOB Shipping point
100302. }.12/39 1/5 . -} 70,000... - | On. Consignment
100303. | if? Le oS 75,0005 = FOB Shipping point
“Note: Inventory has: been correctly set-up based on. an inventory count conducted on December 31,
2018. with appropriate reconciiiaiton and adjustments.

b. -The company inaugurated a Premiums Pr arviotional Plan’ at the. beginning of 2017. Under the said .
promotional program, customers are given frying pan for every 30 product label that they.-may be able to”
present plus P40. The customers inay be able to redeem.-their premiums within 2 years from date of ©
purchase. In anticipation for the premium’s redemption, the company acquired 20,000 units of frying
pan at'P100-perpan in 2017 (3,500 of which remained on:hand at the end of 2017) and additional’.
15,000 units.in. 2018 (the ending inventory of premiuins at the end. of 2018 is 6,000. units). The company
sales. volume if 2017 and in 2018 were'1,5G0,000. and 1, 800,000 respectively. The company further ~
estimates that only 60% of the product.labels will be. presented for premiums redernption.. The —
_. premiums liability per books, represented the balance of the premiums liability at the end of, 2017.
: ‘Adjustments are'yet to be rade for the current year for the‘said Hability account.” cia

c. Employees are entitied £5 day vacation leaves and 15 day sick leaves every year. At the beginning of
2018, the liability for’ compensated absences (as presented per. books) was'for’ 1,200 days. combined
vacation and sick feaves forwarded from the. previous years, as.employees are:allowed to carry’over
unused sick leaves arid-vacation. leaves.up to two years, upon which any unused leaves, are forfeited: In —
2018; additional 900:days unused igaves were forwarded to the subsequent year. From the unused
eaves prior to 2018, 450. were used’ iit 2018 and 300 were forfeited: There was-a'10%: increase in,
employees salaries during the cutrent year. The unadjusted balance. of the accrued liability for =
compensated absences per books reflected the beginning balance of the account, _ Adjustment for accrual aa
at year-end is yet to be made. :

d. The deferred tax liability’ balance is the ‘net deferred tax consequence. of the “company’s. premiums a
~ "expense which is-tax deductible when actual redemption occurs and prepayments which are tax
deductible upon payment. Prepayments had adjusted balances of Pa, 120,000. and P970,000 at the end
of 2017 and 2018: ‘Tespectively. .

€... The key officers’ of the company are-given incentives in the form of. 10%. of net income after bonus but
before 40% income tax: The unadjusted net ficome Of the company as reported per. books was at
PS,450, 000-

oP: ‘Wht i is the correct balance of the Accounts Payable-trade as of December 31, 20187. coe peak ao
"81,170,000 b. 1,120,000 c. 1,100,000 a. 1,220,000.”
os what is the balance of the Estimated Premiums Liabilities as of December 31, 20177. LO
a. 810, ooo: b. 4,350, 000: - Wie G. 3, 700,000 wo de 2,220,000

3. What isthe correct Premiums Experise to be reported in 2018? . : ene

: ae 3,600, 000 oes “be 2, 160, geo c. 320 000: oe : ‘ a. 1,800,000:

a..360, 000 Te ob. 445,

Seto ae eg 405,000 : ds 396,000

“5, What is the correct deferred.tax liability -ag-of December 231; 20182: a Bee ne
. a. 44,000 Jb 362, 600 “ut. 388, 000 : d. 358,400.

6. What is. the correct Accrued Bonus to key officers as ofDecember 31, 2018? a me
a.. 371,901 |: b: 356,569... Cx, 333,450 . 366,773:

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 - RQSA: The Review School of Accountancy == i itisti(‘“—stit‘ Ss Page 2 OF 29
dS
ROBL 4A: F_ INVESTMENTS . ‘
- Benshoppe Inc. had the following portfolio of financial assets as ; of December: 31, 2018. All the financial asset
were acquired in 2018: ‘ :
Financial asset: . ‘Acquisition Cost
‘Aye Corp. Stocks, 20,000 shares me 590,000.
Bee Inc. Stocks, 40,000 shares 1,100,000°.
See Co. 10%, P2M bonds: 1,973,000
Dee Corp. Stocks, 50, 000 shares : 2,400,000
- Audit notes: . -
, a. Aye Corp..shares were acquired with an intention of generating short- -term profits from the share price‘s
fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker's fees and
commissions, Thé shares were acquired on February 20, 2018. A P2 per share cash dividends were
received on March 30. These dividends were declared’ by Aye Corp. on January 20; 2018 to stockholders
as of record date March 1, 2018. .

b.. The company paid. P27. 50 per share, including. PO. 50 per share brokers’ fee on the acquisition ‘of Bee Inc.
_ on March 1, 2018. Thése shares wére acquired for trading purposes. A P3 per share dividends were !
received fram the said shares on May 3, 2018. These dividends were declared: on April 1 to stockholders
an as of record date April 20. ° oy
é, See Co. bonds which pay semi-annual interest every June 30 and December 31,.were acquired on.
October 1; 2018 at P1,973,000, when the prevailing effective interest rate‘on similar instrument was at
~ 12%: The bonds.shaill ‘mature on ‘December 31, 2020. The. company has a ‘businessmodel of. ‘holding debt
~ securities for short-term profits. . .

d,. Dee Corp. ‘stocks were acquired P48 per share, including P3 per stiare brokers’ fees and commissions ‘on
June 30, 2018. Dee Corp. had a total of 200,000: shares outstanding on the same date: “The company »
received P5 dividends per. share form Dee-on December 20, 2018. toe

“@. The following information’ ‘were ‘deemed relevant at year-end and ‘no entries had been made yet by the
company to reffect any of the following information: :
/ : Aye Corp. Bee Inc. See Co. Dee Corp.
Net income in 2018. P1,200,000 . P1;500,000 P2,000,000°' . P2,240,000
Fair Value mon .P35/sh : P25/sh _ 11%... PSi1/sh

Requirements: a Na? i
1.. What is the unrealized. holding gain/loss to be reported inthe 2018 statement of comprehensive income? :
a, 51,948 @1,948.-
'b. 121,948 eT Se d. 122,750- _
2. Whatis the correct carrying, value ‘of investments that should be presented as current ‘asset? \
a. .3,664,948 _ coed. a ¢. 3,665,750 a ~ an
De 3,543,000 . se ees a. 3,765,250 a ose
3. What i is the correct carrying value of investment | in Dee ‘Corp. shares that should bee bresented in1 the 2018
Statement. of: Financial Position?’ .
. a. 2,430,000.. say oe Se PG "2,280,000 bg ga wets
b. 2,150,000 : ~d. 2,550,000 s
4. Assuming that the company’s business model regarding debt securities has.an: objective ofcollecting :
contractual cash flows, what. is the correct carrying value of investment in See Co.Bonds that should be.
“presented.in the 2018. Statement of Financial Position?
“a: 1,960,960° oe c. 1;965,750~
b. . 1,932,690. re . 5 “sd. 4,930,690

PAI OF INVESTME
On January 1, 2018 Iffy Corp; acquired 30,000 shares of ABC Corp’s 100, 000 shares outstanding for P5, 000, 000.
The book. value of ABC's. identifiable net. assets (on. this. date- was at. P14M. “All its .assets ‘carrying value
approximated ‘their fair values: ‘except for a depreciable assets with a remaining life of. 5 years, which was.
undervalued on this, date by: PL. 6M, , \ a

ABC. reported total comprehensive. income ‘in 2018 at P4, 000, 000 which was net of a “Tteign exchange |loss
. reported in as other comprehensive loss at P800,000. ABC also paid dividends at P1.5M at the end of the year,
P500,000 of which is from. pre-acquisition Retained Earnings. The fair market value of shares onn this date. was:at ~
P210 per: ‘Share. : :

Requirements: pe ches F ‘ ne
1. What isthe carrying value of Iffy’s investment in ABC shares as5 of December 31, 2018 using the
: appropriate accounting standards? ;
a. 5,654,000 : : nen oo ” 5,990, 000:
b. ° 5,750,000 & d. 5,894, 000...
2.. Assuming that Iffy. Corp. is a. mediuin-sized entity and: rehat the compariy uses’the fair value’ method in
> accounting for its investment in ABC, how much-in total should be recognized in Iffy: Corp.'s profi it or loss.
for 2018? Wa : .
@ °°1,750,000 ... : me oo... 1,300,000
“bp. -450,000 ~*~ cae - d. 300,000
»

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3. Assuming that Iffy Corp. sald 18, 000 shares of its ABC. shares investment on December 31, 2018 at its
- prevailing fair value, how much in total Should be recognized. in the. profit or-loss as 3 résult/of the
transaction?:) ee : :
” a. 387,600.00 oe a a 406, 000.
“be 646,000" : de> 243,600 oe
: Using’ the information in the previous item, how. muchishall be:the carrying value: of any Fremaining we
investments as of December 34, 2018? oO ‘
a. 2,357,600 0 . a ee ee "2,300,000
b. 2,520,000 - : Ae. 2, 261, 600 ‘ .
Assuming that ABC’ issued 25,000: ‘shares to other stockholders on December 31; 2018 at prevailing fair.
value. without Iffy. Corp’ Ss Participation, how much should be recognized |inthe profit or loss as a result of.
the transaction/event? : . bee oy .
a 81,200© ee Se ee 129,200°- “)
ce ~ 196,200 ae ae as ae ft ~ None Tees
¢

PROB BLE M 36: auprt GE PROPERTY, PLANT AND.EQUIPMENT.

raft balance sheet of ‘Rural. Corporation as.or December 31, 2018 reported the. net. property, plant and :
“equi pment at PG, 270, 000. Details of the arncunt follow: me ye

Land -at® cost ou Ey, an -P1,000,000' ~- ee

. . Building at cost Hee 5 4,060,000 en ‘ 1
se Less accumulated depreciation Salas 2 S ;
: 12/31/17 . .. € 8007000) ~: -3;200,000
> Plant at cost. . woe "5,200,000 cas
Pea Less: accumulated dépreciatign . en es oe,
vat LOpSt/ a7: e e eearee $3,130,000) 2,070,000
- audit notes! M : , Be a EE &
-@) ‘The company ‘policy for all depreciation is thet a full year’s. charge is ‘made
5 in the year of acquisition oro.
‘completion and. none inthe year of dispossi. ; ‘

“(b) “Included in the. sales fevenue ts P300, 000 being the sales proceeds:‘of an item of plant that was sold on-June-
30, 2018. The plant had Griginally cost P900/000 and had been depreciated by P630,000 as of December. 31,
2017, Other than: recording the proceeds in sales and cash). no. other accounting entries: for the disposal of :
the plant, have been made. All Plant isis s depreciated at 25% per nnum en the:eFeducing balance basis.. :

On Septertiber_ 30, 2018, the. company ‘completed the con rruction of 2a new warehouse. The construction — =
: “Was 3 achieved using the company’ ‘5: OWn resources as rations
Purchased materials ar ~P150,0
* Direct labor 9. wets BGO: O00 ee en - os
‘Supervision : =<. 65,000. i . \ ve
< “Design and:planning costs poe 20, 000° ne 2 woe the ei a

included. in’ the above figures are’P'10,000 fer. materials and P25, 000. for, labor costs. that were effectively Jost:
“due to thé foundations ‘being too close to a ‘Heighboring property. Al the above’ costs aré indluded in’ cost. of
sales, ‘The building-was brought into immediate lise upon completion and has an estimated useful. life. of 20.
years: (straight-line Aepretiation). -

“(d) At the’ beginning, of the current year, ‘the company had an: ‘open market basis ‘valuation’ of ‘its properties
(excluding the newly constructed Warehouse), “Land. was valued at P1.2-million and the. property at -P4.8.
- milion. The directors wish these values to be incorporated: into the financial statements. “The properties had.
an-estimated. remaining tife of 26 years at thé cate of the. Valuation’ (straight-line depreciation. is. used) The
“company makes a transfer. to retained earnings ain respect ‘of the excess Sepreciation. on revalued assets.

{e) Depreciation for the year 2018 has Hot yet been accounted for the iin-the draft financial statements.
i
‘QUESTIONS: PSS RE ON Bo
“Based on the: above, and the result ‘of your audit, answer the following:
oa. the carrying amount ‘of the new warehouse as of December 31, 12018 is - .
987,500". a c... 3,000, 000
5 869, 250 ee Se ds 950, 000.
2. The carrying. amount of plant as ‘of December 31, 2018 is Oe e Dea oe ae : /
~2,/710,000.. . 7 2G, 4,282, ‘soc pe es cee on fe
. ie 1,375,310 | ce : de 1,350,060 es ee _ es eee

“3. The: titel depreciation for. the year ended December 31, 2018 is.
a. 740,000 000° oe 380,000 : :
b... 735,750 eo a he ds 788 250.

4. The-revaluation surplus.as of December 31; 21eis' a Cheon S

e 1,720,000. Ce c.. 4,800,600. : a :
Be 470,000 ee re et 960,000

"PROBLEM 22:2 AUDIT oF PROPER t YY, ELAN TAN 1o.ccurEMMENT o

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“RgSA: The Review School of Accountancy “Page 23 of 29.
. You were assigned to audit the Property, Plant and Equipment of Kindness Corporation in line with your firm’s
continuing engagement to audit its financial statements as‘of and for the period ended December 31, 2016. Your
prior year working. papers. included’ the following - analysis of the clients’ property, plant and equipment:

Accumulated | Depreciation Method/

Balances as of 12/31/2015 : Cost Depreciation Useful life
‘Land 2,100,000
a a a pe, Double declining balance, 20
: Building ae |: 8,100,000 2,785,590 | years :
Machinery. and Equipment . 5,400,000 | 2,160,000 | Straight-line, 10 years
Automotive Equipment . ‘ 4,600,000 3,322,222 | SYD, 8 years

‘Audit notes: “
a. A four-year old automotive equipment with: an original cost of P2; 100,000 was traded. in for a new
automotive.equipment having a cash price of P1,600,000 at the beginning of 2016.: The company paid
additional cash of P850,000. The ‘new automotive equipment was recorded by the company at the cash
payment made.- ae . :

b. A insichinety which. was acquired on January of 2012 was totally destroyed by. a fire on June 30,2016,
The machinery was originally acquired ata cost of .P1,800,000.

c A replacement machinery was acquired -on 1 September 1, 2016 on installment basis. The total installment
price is P3,837,054 and.is payable five equal annual installments beginning September 1, 2016. The
company issued a non-interest bearing note in lieu of the machinery. There is no established price for the
machinery. The prevailing market rate of interest for similar securities on the transaction date was at.
10%. : .

d. . “Major improvements on the building’s electrical wiring system was-incurred at the beginning of the year.
The total cost amounting to P1,250,000 was recognized as outright repairs and maintenance expense:

é. The beginning balance of the automotive equipment would have been depreciated ‘at total of P5114, 111
for the year. : : : .

F Salvage value of the assets are considered immaterial.

Requirements:
1.. What | is the gain: or loss from the trade in transaction in ‘item a?
- 266,667. / c. ~ 125,000
- be ee 166,667 - SER ae : d,.. 1,016,667 -:
2. What is:the correct depreciation expense on the building for 2016?»
“ae 698,108. . on c.... 687,691 |
“be 656,441 me : : -d. 531,441:
3. What isthe correct ‘depreciation expense on machinery and equipment f¢for 2016?
‘) @ 572,550... = ~¢. °546,970 .
© be 577,902= : or ws d- 556,667 * .
4. What.is the correct depreciation expense on automotive equipment for 20167
a. 455,555. / c. . 575,000
“by 633,333. - : d. 466,667

PROBLEM 28: AUDIT OF PROPERTY, PLANT AND EQUIPMENT

‘On: January 1; 2014, MONICA CORP, acquired a factory equipment at a cost of P450,000: The equipment is being 0
depreciated using the straight-line method over its projected ‘useful life of 10: years with P50, 900 salvage value. -

on “December 31,-2015,.a determination was-made that the future net cash flows expected from the continued ™ /
‘use of the asset shall be-P40,000 per year. Estimated salvage value remains to be P50,000: The asset also hada.
fair value less Cost to'sell at P220,000 on the same'date. You ascertained that this-was properly computed and
that recognition of the. impairment’ was warranted. (the prevailing interest rate is 10%) .

On December 31, 2017, the asset’s replacement cost was ‘determined to be S55, 000 with a total life of 12 years
from date of acquisition. Salvage value is still estimated to beat P50, 000. You also ascertained that this
valuation is reasonable inn the circumstance. :

You have been asked to: assist the company’ S accountant inthe application oF PAS 36, the standard ‘on
inipairment. of assets: P .

: Required: .
1. . What is the retoverable value of the asset on December 31, 2015? , ee
va. 213, 397 b, 236, 722°, eG, 220,000 <~d. 320,000.

2. How much impairment loss should be recognized on. December.31,'2015?

_ a. 133,278.. b. 156,603 . - “ -€, 150,000 : d. 0-

3... What is the asset’s carrying amount on December 31, 2017, before revaluation? “
a. 160,050. b.. 177,525. ~ €2 290,042 d. 172,548
4. How much impairment. recovery should be reported in the: 2017 income statement?

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 R_SA: The Review School of Accountancy - os Le getk ea . . Boe a Page 2 24 of 29

a. 155,475 = 99,958" og 142,975 ga, 450

5. What. is the depreciation expense ‘in 2019, under - the cost method? a 2 : eu
a. 41, 625 000. 2p. S6/250 0 oe oe 37,875 8 es d. 30,000

6, What is ‘the depreciation expense in-2019; under the révaluation method?

a. "41,625 wi a b 36,250 eo 37,875 od 30,000

“7, Whats the: balance of any revaluation surplus at the. ‘end of 2019; ‘under the piecemeal realization?
a... 47,250 be 55/2250 8 “s €, 52,500. d. 63 ,000

. PROBLEM 29:
2 AUDIT OF INTANGIBLES:
The Cruz Company acquired ‘several small corapanies at-tie end of 2017 and, ‘paged on the acquisitions, reported"
the following intangibles in its December 31, 2617 statement of financial position:
Patent . -P200,000
Copyright. a oo. 7. $400,000
/ Fradename "350,000
» Computer software: nels 100,000
Goodwill. E 900, ‘000° -

The company’s accountant determines the. patent hasan “expected life -of ‘10. years and: no: exipietted ‘residual
value, and: that it- will generate approximately equal benefits each ‘year.. ‘The company expects tovuse the.»
copyright and tradename for the foreseeable future. The accountant knows that the computer software is used in.
.. the company's 120 sates’ offices: The company has replaced the software'in' 60 offices: in 2018, and ‘expects to
+ Feplace the software in 40. more offices, ua 2019 and the Femainder in 2020. :

On December: 31, 2018, there are no indications i impairment of patent, and computer software. The following
information relate to the other. intangible assets: .

a) ‘Because of the: rampant piracy, the copyright. |is expected to generate cash flows of just PB, 000 f per year.

b) The tradename is expected to generate cash flows: of P15; 000 per year.

c)- The goodwill is associated with Cruz Company's Jade Production reporting unit: ‘The cash flows expected to.
* be generated by the Jade Production réporting unit is P200,000 per year for the next. 25 years. ‘The€ reporting
unit has @ carrying amount of P2,100,600 excluding goodwill.

~ Based’ on’ the above and the result of your. ; abit, , determine the folowing: "(Assume t that the e appropriate discount
rate for all items is 5%) ‘
1.) ‘Totalamértization of intangible assets in 2018
a..107,500 = &* Dy c. 88,759
. b. 70,000 : 3. ods 20,000 °
2. Total loss on impairment. in 2018 ~
ta a. 452,470) : c. 47i 211
b,.°530,280 0° : d< 433,720"
3.. Carrying amount of goodwill 0on December 31, 2018
a. .659,720 by he a ¢, °855;060
. 6... 900,000 °°: Pe as F18,789 :
4. Carrying amount of ather intangible assets on Gecember: 31, 2018
_ a. 640,000 : “=e. 980,000
b. 690,000: © ws Ce dat 796,867

PROBLEM 30: auprr OF INTANGIBLES , ee :

Doha Corporation was organized in 2017. Its accounting ‘records
| include only one account for all intangible
assets. The following | is a summary of the entries. that have been recorded dnd posted during the years 2017 and
2018:
a Intangibles oe os :
- AyA7. ‘Franchise expiring on June 36,-2025 i ae oo P2582 000
LO/2 Advance pdyiment on lease expiririg én’October i, 2019 a : 168,000 :
: 12/31 Net loss for 2017 including incorporation fee, P6, 000,-and:
, ° related legal fees of organizing the business, P30, 000 (ail:
bs incurred in 2017). Be ~: 96,000,
1/2/18.” Acquired patent with’ a.usefulstife of 10 years: Se ods 444,000
3/1. - | Cost‘of developing a’secret formula Peo ee ES 489-000
4/1. Goodwill purchased ©’ cose 1,670,400
T/L... - Legal fees for successful defense of patent purchased on 1p OS B00:
40/1| Research and development costs.on-a new project. : ‘ Ay 960,000

: Required: “Ignoring income ‘tax effects, determine the following:

“The unamortized patent cost at December 31, 2018:

“av 399,600°0 8° : i e.e 444,000
—b. 470,880° : af . id. 394, 980-

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)
RgSA: The Review School of Accountancy wee gS 7 ee Page 25 of 29

2. The unamortized franchise cost at December 31, 2018:

a, 204,750. >. . : c.. 189, 000 :
: b: 220,500 rs : d- 236,250... a :
3. The adjusting’ entries on December 31, 2018, should include a retroactive adjustement. to the beginning
retained earnings account at:
a..120,750. : . : c. 132, 750
-b. 84,000 : d. 1,778,550 :
4. As a result of the: adjustments at December 31, 2018, the total. charges. against. income of 2018 should be:
a.. 1,195,800 , - G.. 1,645,800 :
b. t, 681, 800: - , ood. 1,682,550. 7 be *

PROBLEM. 1 FINTA (cj >

Sabrina Manufacturing Corporation. was incorporated on January 3, 2017. “The corporation’s financial statements
for ‘its first: year’s operations were not examined by..a ‘CPA.. You have been -engaged to audit the financial
statements ‘for the year.ended December 31, 2018, and your work is substantially, completed, A. partial trial
: balance of the: company ‘s accounts follows:

Account Title ce Debit. - Credit Soe

Cash : . “-P11,000- me 7
Accounts receivable: oe : .42,500 1
Allowance for doubtful accounts: . oP 500
Inventories . . s 38,500. .- bar
Machinery. - SG .. 75,000
Equipment 29,0006
Accumulated depreciation: ; : 10,000
Patents (Item 1). , 85,000
‘Leasehold improvements (Item 6) 26,000
~ Prepaid expenses. - ; 10,500
Organization expenses (item 7). 29,000
Goodwill (Item 5) ‘ 24,000
Licensing Agreement - A* ,
(Item 2 & 3} : «$0,000
Licensing Agreement = B* ] .
(Item. 2,& 4) : a : -49,000.-

The following information relate to.accounts that may yet require: adjustment:

“Item 1:
Patents. for Sabrina’s manufacturing process were: purchased January 2, 2018, at a cost ‘of P68, 000. An
additional P17,000 was spent in December 2018 to. improve. machinery covered by the patents and ‘charged to
the Patents account: ‘The patents had a hremaining legal term of 17 years. me oe, . 7
4

"Item 2: : , : :
» On January 3, 2017, Sabrina purchased two: licensing agréerients: at that time. they were believed to. have
‘unlimited: useful. lives. The,-balance in-the Licensing Agreement’ - A account included. its purchase price of
P48,000. and :P2,000. in acquisition expenses... Licensing agreement - B also. was purchased on January 3,.2017,
for P50, 000 but it has. been reduced by credit of PI, a00 for the advance collection’ of revenue from the
agreement.

- Sten 3:
In December 2017, an explosion caused a permanent 60 percent reduction in the expected revenue-producing
value of Licensing Agreement. - A, and in January 2019, a flood caused additional damage, which rendered the
agreement worthless.

temas a a
A. study of Licensing Agreement —8 made by Sabrina in ‘Januaty 2018 revealed that itits estimatéd remaining life
expectancy v was ony 19 years as of January 1, 2018.

Tternis er ee : ae : ‘ :
The balance. inthe “Goodwill account’ includes P24,000 paid December 30, 2017, for an advertising program,
which it ‘is estimated will assist in increasing Sabrina’s sales over a period’ of four years. foliowing the
, disbursement. oa

Item 6: ‘ :
The Leasehold Improvement: account includes. (a) the P15,000 cost of improvements with a total estimated useful
life ‘of 12 years, which Sabrina, as tenant made to leased premises in January 2017; (b). movable assembly- -fine ©
‘equipment with a 5-year useful life and with a cost of P8,500,.which was ‘installed in the leased premises in
December 2018; and-(c) real estate taxes of P2,500 paid by Sabrina, which under the terms of the lease, should”
have been: paid by the Jandiord. Sabrina. paid its rent in. full during 2018.. A 10- -year nonrenewable lease was
signed January 3, 2017, for the leased building that Sabrina used in-manufacturing operations. -

Item 7: :
The balance in the Organization Expenses account includes pre; operating costs
« incurred during the organizational
| period:

: AUDITING: PROBLEMS — PREWEEK MATERIALS (CIRENEO/ESPENILLA)

 RSA: The Review School of Accountancy
Questions: . e 4
de: sirens will have an audited balanct-as of December 34,2018. of. Py Ue eat es Re
85,000.
“ahi | os c. 66,006;/ °. Z : : :
b 64,000 o : d: 46,000© aoe >
22° The adjusted balance of Licensing Agreement ~ Aas of December: 34; 2018 iS :
8. 207090 oe : 10,060. oo nae gD Ee ek ew ee
. be, a a. "50,000. Os fury :
3. the adjusted balance: of Licensing AAgreement ~ Beas-of Deceinber 31, 2018 is:
So a. 66,0008 oe oe = 45,500.
Pes be 85,000. ae oe a 64,0060 : 7 =
a 4: Leasehold improvements, het of amortization, audited balance assof December 31, 2018 | is:
wes 12,000 : “13,500 £
- b. 15,000 Bee d. 26,000

: PROBLEM: 32: AUDIT OF : NON-TRADE PAYABLES ee a , .

YZ Corporation, ‘reported the following balances on the fiability portion of its Statement of Financial Position as of
December 31, 2018: : ; :

» Noncurrent ‘Liabilities Cet REED

Note Payable, Bank 10% - ted 500, 000
“Bonds Payable, 12% . : et 3,231, 652 ;
Finance Lease Hability Be Gel 2,200; 000:

Additional information: , : ‘
as The note: payable to the bank was originated on September 1, 2017:and is duee annually 2at the: rate of
-. P1/5SM_ every August a1 starting, 2018.: Interest which is based on the outstanding balance of the loan is
: also: payable. vevery August 24. ‘Interest is'yet to be accrued onthe: ‘note by the: ‘palance ‘sheet date. ,
Payments ©on the note and interest during | the’ current year had been recorded appropriately.

b. . The 5 year,112% bonds payable (with a face’ valise of 3M). were issuied'e on january i, 2018 at the”
- prevailing -market rate of interest which is. 10%. -Interest.on the bonds.are payable semi-annually every
«June 30 and December. 31. - The entry made by the client to record the issuance wasto 7 debit cash and
: credit bonds payable for: the tatat cash. consideration retewed.. pik e . oe . io

c. The Lease Liability is in relation to XYZ" S purchase of a machine on December 31; 2017. The machine ”
was delivered the same day to the company. The lease stipulates that annual payments will be made for :
oo §. years starting December 31,2017, Atthe ed of the-5-year.term, the company ray purchase thes
machine.. The estimated economic life of the machine is 22 years. Your further investigation revealed
: the: following terms of the transaction:
Annualiease payments me p550, 000 —
Purchase option-price. ~ 250,600.
Estimated fair value after'S years. 750, 000 :
Implicit raté vo L0%
Borrowing rate a pS gt - 12%

Entry wade: ONES Pe

: Equipment: ws Te ge _ P2, 730,006 Sues
Cash - ° : , “550,000
Finance Lease Liab:lity. an 2,200,000 |
Payment. on December 3h 2018 1s yet. to. be: recorded. 1
8 : ,
Requirements:
1, “What is the amount to be: capitalized as an s asset for the lease ofthe machinery?
a. 2, 759, 130°" ore “b. 2,240, 470° ic. 2, 293, 450 © fe d. 2,448,656 .

2. What is the carrying vaiue of the leased’ asset as of december 31) 2018? os cee vs
a. 2,040, 547 —b. 1 ,958), 825 . C2, 448, 656° oe d. 2, 244,601

3. What js the correct total poncurrent llabilties to:-be otesented | ins the 2018 Statement, of. Financial
“ Position? toe. ae \ ee, oo
ee ae 3 842, 069. S ms a 6; 193, B97 os a = “e, 7 336,271 Mates : vd. “6: 049, Bat

x 4: What is the correct total current portion of long-term debts, to: be presented inthe 2018 Statement of
vy Financial Position? -
a. 1,500,000: ae b. 1,896,148 a ee 1,860,134 & (dk 2,005,457
: 5. ‘What is the total: ‘interest expense to be reported in tHe 2018 income statement? 4 : L pale ne
. a 1,026,3,097 - : b. 4 (09,214 SR SG. 1,062,2,111, . d. 662,111
oe R,SA: The Review School of Accountancy — oe "page 27 of 29 |

Preference shares, P100 par, 10 percent cumulative,

100,000 shares issued and outstanding . : . ~ -P10,000,000
Ordinary: shares, P20 par, 1,000,000 shares authorized, .
700,000 shares issued and outstanding 14,000,000
Share premium... ; . : . 8,000,000
"Accumulated profits , “30,000,000

There are no dividends in arrears on the preference shares. ‘During 2018, the following transactions occurred:

a. . The board of directors declared a cash dividend totaling to P2, 800, 000 to be paid to.preference and
ordinary shareholders. Later, a share dividend. of 100,000 ordinary shares were declared on ordinary ~
shares. The market value of ordinary shares is P68. per-share on the date the share dividends were
: deciared. .

b. Sometime after the above dividends.were-declared and settled, the board of directors declared as”
property dividends one shares of its investment in Bingo Corp. stocks being held by the company as
financial asset at fair market value through profit or losses for every two ordinary share outstanding.
Bingo Corp. stocks were originally purchased by the company at P12 per share.and have a carrying value:
based on their fair value as per the last balance sheet date, at P20 per share. Bingo Corp. shares were
‘. gelling at P24 when the property dividends were declared and were selling at P25 when the property
-_ dividends were settled. The company had_.a total of 600,000 shares of Bingo Corp. shares.

c. . At the end of 2018, the board declares a four-for-one share split. With the split, the number of ordinary’. :
shares authorized to be issued increased to 4,000,000. At the date of the. share split, the market value
of ordinary share is P75 per share.: ,
x

d. Net earnings during 2018 total P6,000,000,

. Required:
1. What is the: correct debit to the accumulated profits as a ‘result (of the stock dividends declared in item a?
a. 6,800,000 : » ¢, 4,800,000 / : -
b.: 1,000,000 : 4d. 2, 060,000© -
2. What is the total debit to the accumulated profits account as:a result of the declaration and distribution of. the
: property dividends in-item b?. ,
a. 10,000,000 . Le 8, 000; ‘000
b.. 12,500,000-- : d. 12,000,000
3. What is the adjusted balance of the company’s Accumulated profit account at the end: of year?
_ a. 21,600,000 . c. 16,400,000...
b. 18,400,000 7 -d.. 26,400,000
"42" What is the balance of thie ordinary shares account as of December 31, 2018?
: a. 20,800,000 . . : ‘ ‘c:. 18,000,000
b. 14,000,000 —, G16, 000, 000.

PROBLEM 34: AUDIT OF EQUITY ACCOUNTS

In your audit of Spurs Inc. for the calendar year ended December 31, 2018, you discovered the following charges
to the company 's Retained Earnings account: :

Balance, January1 So P7,800,000

- Unrealized holding loss on financial assets at fair value through. other
comprehensive income or loss’. fy poe (400,000)
Inventory fireloss ~~ : er = (150,000) -
Impairment:Joss on Property. Plant and Equipment (750,000)
15% Stock dividends declared (100,000 shares outstanding at P100 par) (1,500,000)
Loss.on sale of equiprnent = si .-.(200,000)
Correction of a prior period error : bel - (1,500,000) -
Loss.on_ retirement-of ordinary shares. as treasury” ve ~ (1,050,000), --
Gain‘ on sale of ordinary shares asexcess over par” ~ ; 1,000,000 ©
Gain on premature retirement of bonds- : . 300,000 ve
Unrealized holding gain on financial asset held at fair value through Ss / :
profit/loss . ~~” 800,000
Proceeds from sale of donated shares, . i » ~ 800,000
Net:income for the year . bo, ae : 9,000,000
- Reserve for Plant expansion . Co : (3,000,000) -

Audit Notes
The 15%: ‘stock dividends were: declared..on’ November -1;° 2018 distributable to. stockholders as of
December-1, 2018 distributable on January 15, 2019. Spur's stocks were selling at P110 on November 1

be. The company 'S Share premium from treasury stock transaction account.amounted to P850,000.

ote The company’ Ss management decided to change its inventory costing method from. the weighted average
_to-the FIFO approach. during the current year. The inventory balances under the.two. methods are as
follows:
Te ‘ AVERAGE FIFO
Beginning . : : 2,500,000 2,600,600
JEnding-< . 1,900,000 2,200,000

AUDITING PROBLEMS ~ PREWEEK MATERIALS: (IRENEO/ESPENILLA) | 70 2 .

af
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_ RgBA: The Review School'of Accountancy 9 ep Pag

28. ofe29.
pO

“ The company, however, iss yet to effect the said change in its current-financial statements. |
Using the information above, answer the following:’

1. What i is- the net adjustment to. the: retained earnings .account:for the declaration of the:stock dividends? :
“a, 100,000 < f Pay : 7 “£150,000. : 2
~b,- 50,000 , , dino adjustement .
2... What is the correct net income for the year 2018?.- o
a a. 9,100,000 ; oo! c. 9, 200, 000
b: 9,000,000. 6 7 : : de 9,300,000
‘3. What is the retroactive adjustment to the retained earnings ‘beginning in 2018 asa result of the change in
the inventory cost formula from the > weighted average to the FIFO approach? : 7 .
a. 100,000 debit 2 » S-ce 300,000 ‘credit
b: 260,000 credit o =. oo »d. 100,000 credit
4... What is. the correct ‘retained earnings at the end of 2018?
@2°44,200,000) 2 ‘€, 10,900, 000°
b. 10,6850,000- sd. 40,750,000

Ekkans ‘Gorporation wasis incorporated in 2017. “During 22017, the company issued 100, 000 shares of PL par value
ordinary shares for P27. 7 per share. During 2017, Ekkans Cor poration had a profit of P250; 000. and. ‘paid dividends ©
of 2B, 060. oe Y

During 2018;. the. company |had the following transactions... : :

1/2 -Issued 10,000: shares: of P100 par. value cumulative preference shares at par. The preference
: : shares are convertible inte five ordinary shares and had a dividend rate of 6%.

3/1 . issued 3, ‘000 ordinary shares: for legal service performed. The value’ of the tegal services was
P100,000.. The shares are ditively traded: ona stock exchange and valued on 3/1 at P32 per
share. , .

Fe ve Issued’ 40, 000 ordinary sharek for e42 per share. ,

10/ i ‘ Repurchased 16, 900 treasury shares for P34 per share. .

12/1: Sold 3, 000 treasury. shares for p29 per share.

“42/30, os Decored ahd paid a dividend: of PO. 20 per

f ‘share< on ordinary shares and a 6% dividend onnthe
preference shares.

“During 2018 Ekkans Corporation had a ‘profit of P380, 000.

QUESTIONS: sp, Bogen ES

Based on the above and the result of your r audit, “determine: the following:
1... Total share premium’ as of December 31, 2018
a. 4,333,000 c. 4,337,600
: > ‘by. 1,733,000 poe “de. 4,348,000°
2. Total rétained: earnings. as of December 31, 2018
a. 501, ‘O60 ce ena = ge 602,006 wo : Y
b.. 516,000. d.- 279,900 Coa : - cot
3 Total equity, as of December 31, 2018 . eo :
a. .5,535,000°" : .c, 8,621,000
“bh 5, 539, O00 : 5,556, 000.
4e Basic earnings per share for the year 7 2018
a. 3.20 : , "2.69 0 ne Ce
b. 1,60 Be og. 2AL ot oe
5. Diluted. ‘earnings per: share for the year 2018" Be EE Sh a
a, 2:11 : €. ‘2.25 oe Se
bee Page _— Ge “1.90 :

i {QUITY ACCOUNT:
Presented. below: is. the. Seiten of. financial position: of Diese |’ Corporation ‘prepared by. ‘the chief accountant for
the current year, 2018, wee e . PN e be
: Diese! Corporation
Staternent of Financial Position
_ Gecernber 31, 2018... ;
Current assets sys - P 435,000.
_. Investments “= ae 640,000.
Property plant, and equipment oe 4,720,000, -
Intangible assets wy 2. 305,000° 7 3) o>.
oe essa tek! a P3,100,000 0 0 >
~ “Current liabilities ip 330,000
AUDITING PROBLEMS - PREWEEK MATERIALS (IRENEO/ESPENILLA).
 RgSA: The Review School of Accountancy es - Page 29 of 29°
Diesel Corporation.
‘Statement of Financial Position
December 31, 2018
Long-term liabilities : / 1,000,000 ~
Shareholders’ equity “ -1,770,000°
P3,100,000 ‘

» Consider the following information: ~ . .

1.. The current assets section includes:-cash P100,000, accounts receivable P170,000 less P16,000 for allowance
for doubtful accounts, inventories P180,000, and unearned revenue P5,000. The cash balance. is composed
of P114, 900, less a bank overdraft of P14,000. Inventories are stated on the lower of FIFO cost or market.

2; The investments section’ includes! the cash surrender value of a tife insurance contract p40, 000: investment :
in ordinary shares,- short-term (trading) P80,000. and. long-term (available-for-sale) P270,000; and bond
sinking fund P250,000. The cost and fair value of investments in ordinary shares are the same. ,

3. Property, plant, and equipment inctudes: buildings P1,040,000- tess accumulated depreciation P360,000;
equipment P450,000 less. accumulated depreciation P180,000; land F500, 000; and land held for future use
P270,000. . .

4. intangible assets include: a franchise P165,000: cece P100, 000; and discount on bonds payable P40,000.

5. Current liabilities include: accounts payable P90, 000; notes payable - short term. P80, 000 and fong - term
P120,000: and taxes payable P40, 000. .

6. Long - term Nabilities are compose solely of 10% bonds payable due 2025.

oA Shareholders' equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares
for P450,000; and ordinary shares, P1.00 par value, authorized 400,000 ‘shares, issued 100,000 shares. at an
‘average price of| PLO. In addition, the corporation: has retained earnings. of P320,000.

8.. The company’s management does not t elect to use the fair value option for-any. of its financial assets or.
° liabilities. _ .

QUESTIONS:
Based on the above and the result of your. audit, compute the adjusted amount, of the following to be reported on:
the company’s statement of financial position as of December 31, 2018: e

iA. Current assets _ Bete

a. “588;000- Cc. 534,000 :
b. 574,000 d. 548,000" 2
2. Noncurrent investments. : /
a. 560,600 c.. 830,000
. b. 520,000 . d.~ 790,000
3: “Property, plant aiand. equipment aan oe
, a. 1,615,000- c... 1,450,000
b. 1,885,000 ds 1,720,000
4... Total assets ‘ :
~ a. 3,079,000 : c. 2, 814,000 ..
b. 2,979,000. “ d. 3,093, 000
5. Current liabilities ~ s
a. 229,000 , : c. 210,000
-b. 224,000 ‘ da 215,000

AUDITING PROBLEMS — PREWEEK MATERIALS (IRENEO/ESPENILLA) 702.

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