GENSANTOS FOUNDATION COLLEGE, INC.

Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS EJ SEBUA, CPA
CORRECTION OF ERRORS QUIZ
PROBLEM 1. Gensan Traffic City Corporation’s current assets and liabilities section of the balance sheet as of December
31, 2017 appear as follows:
Current assets
Cash P1,200,000
Accounts receivable P2,670,000
Less: Allowance for doubtful accounts 210,000 2,460,000
Inventories 5,130,000
Prepaid expenses 270,000
Total current assets P9,060,000

Current liabilities
Accounts payable P1,830,000
Notes payable 2,010,000
Total current liabilities P3,840,000
The ff. errors in the corporation’s accounting have been discovered:
a) January 2018 cash disbursements entered as of December 2017 included payment of accounts payable in the
amount of P1,170,000, on which a cash discount of 2% was taken.
b) The inventory included P810,000 of merchandise that have been received at December 31 but for which no
purchase invoices have been received or entered. Of this amount, P360,000 had been received on consignment;
the remainder was purchased FOB destination, terms 2/10, n/30.
c) Sales for the first four days in January 2018 in the amount of P900,000 were entered in the sales book as of
December 31, 2017. Of these, P645,000 were sales on account and the remainder were cash sales.
d) Cash, not including cash sales, collected in January 2017 and entered as of December 31, 2017, totalled
P1,059,720. Of this amount, P699,720 was received on account after cash discounts of 2% had been deducted;
the remainder represented the proceeds of a bank loan.
Requirements:
1. Adjusted cash balance as of December 31, 2017 4. Adjusted working capital as of December 31, 2017
2. Adjusted accounts receivable as of December 31, 2017 5. Net misstatement in the reported net income for the
3. Adjusted accounts payable as of December 31, 2017 year ended December 31, 2017 as a result of the errors

Problem 2. HALA ANG KABAW Company’s December 31 year-end financial statement contained the ff. errors:
December 31, 2016 December 31, 2017
Ending inventory P100,000 understated P90,000 overstated
Depreciation expense 20,000 understated

An insurance premium of P75,000 was prepaid in 2016 covering the years 2016, 2017, and 2018. The same was charged
to expense in full in 2016. In addition, on December 31, 2017, a fully depreciated machinery was sold for P160,000 cash,
but the sale was not recorded until 2018. There were no other errors during 2016, 2017, and 2018 and no corrections
have been made for any of the errors. Ignore income tax considerations.

Requirements: (for all questions, indicate whether it is understated or overstated)

1. How much is the total effect of the errors on the
2016 net income?
2. How much is the total effect of the errors on the
2017 net income?
3. How much is the total effect of the errors on the
working capital at December 31, 2017?
4. How much is the total effect of the errors on the retained
earnings at December 31, 2017?
5. How much is the total effect of the errors on the working
capital at December 31, 2018?

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