Audit of Expenditure and Disbursements Cycle BA 123 Exercise Set

Problem 7: BA 123, Inc. (Inventory for a Manufacturing Industry)

Your client, BA 123, Inc. takes inventory on a cycle basis throughout the year. The following is an
inventory card for MockCPA, the latest PC game among the wealthy and bright kids of Manila.
MockCPA was developed to stimulate CPA board exam paranoia among its users. The
information presented below covers the month of November 2019:

Date Received Issued Balance Cost Received Issued Balance

1 Balance 15 100 1,500
2 Transfer 35 50 100 3500 5,000
from work-
in process
6 Sales 8 42 100 800 4,200
invoice #
137
11 Transfer 45 87 100 4,500 8,700
from work-
in process
13 Sales 9 78 100 900 7,800
invoice #
159
16 Sales 4 74 100 400 7,400
invoice #
173
20 Correction 10 84 100 1,000 8,400
per count

On November 14, 2019, a count of MockCPA was conducted with 88 as the resulting figure to
which you assented since you were present to observe the count. A correcting entry was
subsequently booked with credit to Inventory Over/Short. You further gathered the following
information:
1. Three of the units on hand on November 14, 2019 were part of the 9 units covered by Sales
Invoice No. 159. Each unit was sold for ₱200. The units were held pending shipment
instructions.
2. Sales invoice No. 137 was posted to the wrong card. The invoice actually was for 8 units of
Mock123Finals which carries a cost of ₱190 per unit. Each unit of Mock123Finals was sold
for ₱300. A physical inventory of Mock123Finals was found to be 8 units short and an
adjustment was accordingly made.
3. Although Sales invoice No. 173 was posted on November 16, 2019, the goods were actually
shipped before inventory count was made. Each unit was sold for ₱200.
4. The transfer from work in process on November 11, 2018 should have been for 54 units @
₱100. Work in process has not been fully inventoried.

REQUIRED:
1. Prepare a schedule computing the actual overage or shortage of MockCPA on November
14, 2019.
Audit of Expenditure and Disbursements Cycle BA 123 Exercise Set

Problem 8: AVALON COMPANY (Sales, AR, Inventory, and AP)

The following information is based on a first audit of Avalon Company:

The client had not prepared financial statements for 2017, 2018, or 2019. During these years,
no accounts have been written off as uncollectible, and the rate of gross profit on sales has
remained constant for each of the three years.

Prior to January 1, 2017, the client used the accrual method of accounting. From January 1,
2017, to December 31, 2019, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2017.

As a result of your examination, the correct data shown in the table are available:
12/31/2016 12/31/2019
Accounts receivable balances:
Less than 1 year old ₱30,800 ₱56,400
One to two years old 2,400 3,600
Two to three years old 0 1,600
Over three years old 0 4,400
33,200 66,000
Inventories 23,200 37,600
Accounts Payable for inventory purchased 10,000 22,000

Cash received on accounts receivable in 2017 2018 2019

Applied to:
Current year collections ₱297,600 ₱323,600 ₱417,600
Accounts of the prior year 26,800 30,000 33,600
Accounts of two prior years 1,200 800 4,000
TOTAL ₱325,600 ₱354,400 ₱455,200
Cash Sales 34,000 52,000 62,400
Cash disbursements for inventory purchased ₱250,000 ₱282,400 ₱347,600

REQUIRED:
Prepare a schedule setting forth the sales, cost of goods sold, and gross profit for 2017, 2018
and 2019, and in total for the three years. The schedule should be supported by necessary
computations.
Audit of Expenditure and Disbursements Cycle BA 123 Exercise Set

Problem 9: VIEGO COMPANY (Correction of Errors - Expenses)

As an audit associate, you have been assigned to audit Viego Company’s reported revenue for
2020. During your audit, after performing substantive procedures through tracing and cutoff
tests, you found the following errors in the company’s records:

Year ending December 31

2018 2019 2020
Omissions from the books:
a. Accrued expenses, December 31 ₱150,000 ₱70,000 ₱220,000
b. Prepaid expenses, December 31 160,000 120,000 60,000

INSTRUCTIONS: Assuming a tax-free world, determine the effects of the errors noted on the
specific assertions below. Write O if the effect is an overstatement, U if the effect is an
understatement, and X if the error has no effect, then indicate the amount of the
over/understatement, if applicable.

EFFECT AMOUNT
1. What is the effect on 2019 net income of the omission of
accrued expenses at the end of 2018?
2. What is the effect on 2020 net income of the omission of
accrued expenses at the end of 2019?
3. What is the effect on 2020 net income of the omission of
accrued expenses at the end of 2018, 2019, and 2020, when
considered together?
4. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses at the
end of 2018 and 2019, when considered together?
5. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of accrued expenses at the
end of 2018 and 2019, and 2020, when considered together?
6. What is the effect on working capital at December 31, 2020 of
the omission of accrued expenses at the end of 2018, 2019,
and 2020, when considered together?
7. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses at the
end of 2018?
8. What is the effect on 2019 net income of the omission of
prepaid expenses at the end of 2018 and 2019?
9. What is the effect on working capital at December 31, 2020 of
the omission of prepaid expenses at the end of 2019 and 2020?
10. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of prepaid expenses at the
end of 2018 and 2019?
11. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of prepaid expenses at the
end of 2018, 2019, and 2020?
12. What is the effect on 2020 net income of the omission of
prepaid expenses at the end of 2018 and 2019?
Audit of Expenditure and Disbursements Cycle BA 123 Exercise Set

EFFECT AMOUNT
13. What is the effect on working capital at December 31, 2020 of
the omission of prepaid expenses at the end of 2018, 2019, and
2020?
14. What is the effect on 2019 net income of the omission of
accrued expenses and prepaid expenses at the end of 2018
and 2019?
15. What is the effect on 2020 net income of the omission of
accrued expenses and prepaid expenses at the end of 2018,
2019 and 2020 when considered together?
16. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses and
prepaid expenses at the end of 2018 and 2019?
17. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of accrued expenses and
prepaid expenses at the end of 2018, 2019 and 2020 when
considered together?
18. What is the effect on working capital at December 31, 2020 of
the omission of accrued expenses and prepaid expenses at the
end of 2018, 2019 and 2020 when considered together?