CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

 735-9031 / 735-8901

AUDITING PROBLEM OCTOBER 2007 BATCH

2nd PRE-BOARD EXAMS AUGUTS 19, 2007 (SUN) 7:30 – 10:00am
INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for
each item by shading the box corresponding to the letter of your choice on the answer sheet provided.
STRICTLY NO ERASURES ALLOWED. USE PENCIL No. 1 or No. 2 only.

PROBLEM 1 - You are a senior accountant on the staff of Alejo & Associates, CPAs. You are conducting the
annual audit of Harry Corporation for calendar year 2007. You are now working on the audit of the accounts
receivable and related allowance for doubtful accounts.

ACCOUNTS RECEIVABLE – TRADE

Reconciliation between General Ledger Balance and
The Total of Subsidiary Ledger Balances
December 31, 2007
Total of subsidiary ledger balances P 5,635,700
Undelivered sales based on sales orders received up
to December 31, 2007 per journal voucher No. 1962 2,732,900*
Goods consigned to Robinsons Appliance Center and others 3,260,700**
Collections received from Cebu and Davao branches
on January 2 based on official receipts dated December
31, 2007 for sales made on December 16, 2007 ( 1,092,800)***
Balance per general ledger P10, 536,500
* Goods are physically segregated during inventory count. Sales invoices for these were issued on January 2 and
deliveries to customers were made on January 3, 2008.
**These goods were physically verified in customers’ stores. Under the terms of consignment, goods are billed to
customers, based upon their sales report.
***Subsequently deposited on January 3, 2008.
Customers are billed at 20% above cost. Term 30 days.

ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES

Analysis of Movement during the Year
December 31, 2007
Allowance, December 31, 2006 P1,020,000
Movement during the year
Provisions 3,425,625
Write-offs ( 4,164,370)
Allowance, December 31, 2007 P 281,255

1. Aging of accounts receivable – trade based on accounts receivable schedule as of December 31, 2007, before
considering any adjustments on the accounts:

Per Client Per Audit

Current P4,469,760 P4,067,320
31 – 60 days 267,320 402,440
61 – 90 days 455,440 267,320
91 days and over 443,180 898,620
P5,635,700 P5,635,700
2. A review of collectibility of each account disclosed the following:
a. A customer with an account balance of P568,000 classified as current in aging can no longer be located
by company lawyers. The customer’s check in payment of this account was returned by the bank on
May 15, 2007. He has no known assets and his liabilities to other creditors totaled to P7,000,000. The
other creditors have the same experience as the company.
b. The lawyers informed us that debtors with account balances totaling P790,450 (classified as 91 days
and over in the client’s aging) were already found worthless. They suggested that these accounts be
written off next year.
c. It is the companies’ policy to provide monthly for accounts doubtful of collection, based on aging
schedule as follows: 2% for current, 5% for 31 to 60 days, 10% for 61 to 90 days and 30% for 91 days
and over. Monthly write-offs are charged against the allowance. At the end of the year a review of
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 2 of 6
collectibility of each account is undertaken by the credit and collection manager, the lawyers together
with a representative of its external auditor.
3. The balance of allowance for doubtful accounts should be adequate to cover possible losses the company may
incur in cases of non-collection: that is the account balance at the end of the year should either be:
a. Total amount arrived at as doubtful by applying the percentage of possible losses to the total
of the account age classification or
b. Total amount arrived at as doubtful based upon the results of the review of collectibility of
each account: whichever is the higher of (1) and (2) above.
Questions:
1. The gross amount of Trade Accounts Receivable to be reported in the audited balance sheet at December 31,
2007 is
a. 1,019,500 b. 3,752,450 c. 10,536,500 d. 9,178,050
2. The Allowance for Doubtful Accounts to be reported in the audited balance sheet at December 31, 2007 is
a. 138,795 b. 790,450 c. 568,000 d. 429,205
3. The Doubtful Accounts Expense to be reported in the audited income statement for year 2007 is
a. 4,502,820 b. 3,993,625 c. 4,216,075 d. 3,564,420
4. The Allowance for Doubtful Accounts based on the aging of receivables is
a. 140,625 b. 138,795 c. 568,000 d. 139,798

PROBLEM 2 – Masagana Corporation purchased P100,000 8% bonds for P92,418 on January 1, 2007. Masagana
classified the bonds as available for sale. The bonds were purchased to yield 10% interest. Interest is payable
annually every January 1. The bonds mature on January 1, 2012. On January 2, 2009, Masagana classified the
bonds as held to maturity.

The prevailing interest rates of the bonds are as follows:

December 31, 2006 10%

December 31, 2007 11%
December 31, 2008 12%
December 31, 2009 11.5%

Questions:
5. Interest income for year 2008
a. 8,000 b. 9,366 c. 9,242 d. 9,818
6. Market value of investment as of December 31, 2008.
a. 95,026 b. 90,393 c. 93,240 d. 90,973
7. Unrealized gain or loss on AFS as of December 31, 2009.
a. (1,786) b. (4,053) c. 4,053 d. (4,633)
8. Unrealized gain on loss as of December 31, 2009.
a. (3,289) b. (2,709) c. 3,289 d. (2,519)
9. Carrying value of investment as of December 31, 2009.
a. 97,240 b. 96,429 c. 93,240 d. 110,000

PROBLEM 3 – Marimar Corportion, a securities investor, had the following transactions on Margarita Corporation
common stock during the year 2007:

February 8 - Purchased 200 shares of Margarita common stock at P360 per share,
plus brokerage charge of P720.
June 10 - Received a 100% stock dividend and a cash dividend of P5 per
share.
November 3 - Received stock rights entitling him to purchase one new share at P50
for every four shares held. On this date, rights were quoted at P10
each and stock was quoted ex-rights at P170 each share.
Exercised 300 rights and sold remaining rights at P12 each.
November 21 –
Sold 100 shares at P150 each.

December 15 -

Marimar classified the investment as Trading Securities.

Questions:
10. The gain or loss on sale of stock rights on November 21, 2007 is
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 3 of 6
a. 1,200 gain b. 2,840 loss c. 2,000 loss d. 200 gain
11. The gain or loss on sale of stock on December 15, 2007 using the first-in, first-out basis of assigning costs to
sales is
a. 2,170 loss b. 3,180 loss c. 2,000 loss d. 3,180 gain
12. The cost of the stock rights received on November 3 is
a. 4,000 b. 4,040 c. -0- d. 8,040
13. The cost of additional shares acquired on November 21 amounted to
a. 6,780 b. 3,750 c. 6,750 d. 6,000
14. The cost of shares held as of December 31 2007 is
a. 52,290 b. 57,750 c. 51,110 d. 58,290

PROBLEM 4 --- Geoffrey and Jekell are partners in the operation of a retail store. They are concerned about the
apparent discrepancy between their income and their volume of sales. Although they maintain incomplete
accounting records, their experience in the business told them that there is a possible theft or larceny on the part of
their staff.

The partners have asked you, in connection with your initial audit covering the calendar year 2007 to apply such
tests as you can to determine whether there is any indication of shortage.

In the course of your examination you obtain the following facts having a bearing on the problem.

a. The physical inventory taken December 31, 2007, under your observation, amounted to P25,000 cost, P23,000
market. The inventory of December 31, 2006, was P38,000 cost, P36,500 market. It has been the firm’s
practice to value inventory at “lower of cost or net realizable value” treating any loss or decline in market
value as “other expense”.
b. Using the treatment of “loss or decline in Net realizable value” of inventory as mentioned in (a) above, the
average gross profit in recent periods has been 35 percent of net sales. The partners inform you that this
percentage seems reasonable and that they expected the same results for 2007, since their mark-up per cent
was approximately the same as in the past.
c. The December 31, 2006, balance-sheet shows accounts receivable of P48,000. Notes payable to banks and
trade accounts payable were combined on the December 31, 2006 balance sheet. They totaled P26,000. The
firm records accounts payable at the net figure, as cash discounts are seldom missed. Purchases have been
shown net in past income statements. Sales discounts have been treated as deduction from sales in the past.
d. During 2007, accounts were written off in the amount of P8,000 and an account for P6,000 written off in 2006
was collected and recorded as a regular collection on account.
e. Unpaid sales slips show that customers owed P55,000 on December 31, 2007.
f. Unpaid invoices indicate that the firm owed trade creditors P12,000 at the end of 2007. Record of notes
outstanding indicates that P10,000 was owed to banks on December 31, 2007.
g. Sales returns amounted to P3,000 and purchase returns amounted to P4,000.
h. Of the items in the cash records, the following are pertinent:
Receipts:
From customers (after P4,000 discounts) P105,000
From bank loan (net of 60 day, 6% discount) 9,900

Disbursements:
To trade creditors (after P8,000 cash discounts) P 70,000
To bank loans 12,000
To customers for returned goods 1,000
Questions:
15. Gross Sales for calendar year 2007
a. 113,000 b. 108,000 c. 120,000 d. 121,000
16. Net Purchases for calendar year 2007
a. 68,000 b. 70,000 c. 76,000 d. 82,000
17. Balance of Accounts Payable as of December 31, 2006
a. 12,000 b. 10,000 c. 16,000 d. 14,000
18. Estimated ending inventory as of December 31, 2007
a. 31,000 b. 35,800 c. 27,350 d. 32,550
19. Possible inventory shortage as of December 31, 2007
a. 2,350 b. 7,550 c. 10,800 d. 6,050

PROBLEM 5 – Prepayments in the amount of P363,000 is broken down into Prepaid Insurance of P120,000, Office
Supplies Unused of P18,000 and Advance Rental and Deposit on Lease of P225,000.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 4 of 6
In the year 2007, your client purchased two insurance coverage, one for four (4) motor vehicles and the other one to
cover the cost of the inventory against fire. The face value of Motor policy is P2,000,000 while that of inventory is
P4,000,000. The coverage for both is a period of one year counting from the date the policy premium was paid for.
The motor policy coverage was taken August 31, 2007 for a premium of P90,000, while that of the inventory was
taken last October 1, 2007 for a premium of P30,000.
To be able to save on costs, the purchasing manager sees to it that the office supplies are brought not from the
regular bookstore but from the retailers of the same located in the Quiapo areas of the City of Manila. They
realized that this arrangement could lead to savings of around 25% to 30%. You asked for an inventory of supplies
as of December 31, 2007 and found out that P11,600 were still unused at year-end.
In the year 2007, the company renewed the lease contract, this time for 3 years with Palmera Corporation subject to
renewal every 3 years with a priority right to buy the property in the case the owner decides to sell later on. A
deposit equivalent to 3 months rental and advance rental for a year was given and the rest was in the form of
postdated checks to cover the rental for the last two years of the lease contract. The lease contract states a monthly
rental of P15,000, and became effective July 1, 2007.
Questions:
20. Prepaid insurance as of December 31, 2007
a. 82,500 b. 37,500 c. 60,000 d. 22,500
21. Office supplies expense
a.11,600 b. 18,000 c. 6,400 d. 1,900
22. Prepaid rent as of December 31, 2007
a. 90,000 b. 180,000 c. 112,500 d. 120,000
23. Prepaid expense as of December 31, 2007 is
a. 90,000 b. 184,100 c. 172,500 d. 192,100

PROBLEM 6 – You are engaged to audit the records of Western Company, which has not previously been audited.
The trial balance at December 31, 2007, follows:

Debits Home Office Branch

Cash 15,000 2,000
Accounts receivable 20,000 17,000
Inventory - December 31, 2007 30,000 8,000
Fixed assets – net 150,000
Branch office current account 44,000
Cost of sales 220,000 93,000
Expenses 70,000 41,000
Total 549,000 161,000
Credits
Accounts payable 23,000
Mortgage payable 50,000
Capital stock 100,000
Retained earnings - January 1, 2007 26,000
Sales 350,000 150,000
Accrued expenses 2,000
Home office current account 9,000
Total 549,000 161,000
The following additional information is to be considered:
1. The branch receives all of its merchandise from the home office. The home office bills goods to the branch at
125% of cost. During 2007 the branch was billed for P105,000 on shipments from the home office.
2. The home office credits sales for the invoice price of goods shipped to the branch.
3. On January 1, 2007, the inventory of the home office was P25,000. The branch books showed a P6,000
inventory.
4. The home office billed the branch for P12,000 on December 30, 2007, representing the branch’s share of
expenses paid at the home office. The branch has not recorded this billing.
5. All cash collections made by the branch are deposited in a local bank to the account of the home office.
Deposits of this nature included the following:
Amount Date Deposited by Branch Date recorded by Home Office
5,000 December 28, 2007 December 30, 2007
3,000 December 29, 2007 January 2, 2008
7,000 December 30, 2007 January 3, 2008
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 5 of 6
2,000 January 2, 2008 January 5, 2008
6. Expenses incurred locally by the branch are paid from an imprest bank account that is reimbursed periodically
by the home office. Just prior to the end of the year, the home office forwarded a reimbursement check in the
amount of P3,000, which was not received by the branch office until January 2008.
7. It is not necessary to make provisions for income tax.

Questions:
24. The combined cash amounted to
a. 17,000 b. 30,000 c. 20,000 d. 27,000
25. The combined inventories will be
a. 36,400 b. 44,400 c. 48,000 d. 38,400
26. The corrected Home Office and Branch Accounts amounted to
a. 21,000 b. 19,000 c. 31,000 d. 34,000
27. Shipments in transit as of December 31, 2007 amounted to
a. 10,000 b. -0- c. 25,000 d. 20,000
28. The combined sales will be
a. 500,000 b. 434,000 c. 395,000 d. 350,000
29. The combined cost of sales will be
a. 210,400 b. 294,400 c. 313,000 d. 219,800
30. The adjusted Branch profit, before tax, amounted to
a. 13,700 b. 20,600 c. 16,000 d. 22,600
31. The combined net income amounted to
a. 51,600 b. 58,400 c. 76,000 d. 61,600
32. The combined operating expenses amounted to
a. 111,000 b. 70,000 c. 123,000 d. 73,000

PROBLEM 7 - The general ledger accounts showed the following cash balances at December 31, 2007:
BDO current account P210,000
EPCI savings account 90,000
Working Fund 10,000
Total per WBS P310,000

BDO Current – The following bank reconciliation as of December 31, 2007, was given to you by the accountant:

Balance per books, December 31, 2007 P210,000

Add: Deposit in transit 8,000
Debit memo for customer’s check returned unpaid 10,000
Less: Checks drawn but not paid by bank,
per schedule below P18,000
Error for an accounts payable entered on books
as P7,000 but drawn and paid by bank as P12,000 5,000 (23,000)
Computed balance 202,000
Unlocated difference 6,000
Balance per bank, December 31, 2007 208,000

Check drawn but not paid by bank

Check No. 346 P 2,250
490 4,960
509 7,490
615 3,710
805 1,550
950 __1,040
P18,000

You traced the balance per books to the general ledger and the balance per bank to the bank confirmation reply.

EPCI Savings Account – The balance in this account represents funds set aside for the purchase of a computer, per
resolution of the Board of Directors.
CRC-ACE/AP_2nd Preboard Exams October 2007 Page 6 of 6

Working Fund – This fund was replenished as of December 31, 2007.

Questions:
33. How much is the adjusted and reconciled balance of the BDO current account as of December 31, 2007?
a. 200,000 b. 210,000 c. 198,000 d. 195,000
34. After considering all audit adjustments, what should be the correct total of outstanding checks?
a. 21,000 b. 18,000 c. 16,000 d. 13,000
35. The amount of cash to be reported in the audited balance sheet at December 31, 2007 is
a. 195,000 b. 295,000 c. 205,000 d. 310,000

AUDITING PROBLEMS

1 B 11 C 21 C 31 D
2 C 12 A 22 A 32 C
3 A 13 C 23 B 33 D
4 B 14 B 24 B 34 A
5 B 15 C 25 B 35 C
6 B 16 A 26 D
7 D 17 D 27 A
8 A 18 D 28 C
9 C 19 B 29 A
10 D 20 A 30 D