Auditing Theories Answer Key

1. C 6. B 11. B
2. C 7. B 12. C
3. C 8. B 13. D
4. B 9. A 14. A
5. D 10. B 15. C

Auditing Problems Answer Key

1. Substantive Audit of Cash

Solution:

Rose Company
Bank Reconciliation
May 31

Balance per bank statement P 6,299

Add: Deposit in transit P 875

Bank error (collection charge error) 20 895
P 7,194
Deduct: Outstanding checks
No.614 P 511
No.616 346
No.617 566 1,423
Correct cash balance P 5,771

Balance per books 4,906

Add: Note and interest collected by bank P 1,290
(Book error) (check No. 609: P 473-437) 36 1,326
6,232
Deduct: Bank service charge for May P 14
NSF check returned with bank statement 255
Book error (check No613: P423-243) 180
Bool error failure to record bank service charge for April 12 461
Correct cash balance P 5,771
2. Substantive Audit of Cash

Solution: Dolly, Inc.

Balance per books, October 31……………………… P 17,056.48

Add: Error in recording customer's check-
check for P 725 recorded as P 625………….. c. P 100.00
Error in check record-check No. 652 for
d
P 32.90 entered as P 329.00………………….. . 296.10
Collection of M, Sin's note by bank not yet
recorded, P 2,562.50 less collection charge,
12.50……………………………………………………….. f. 2,550.00 2,496.10
P 20,002.58
Deduct: Customer's check found to be
uncollectible……………………………………… a. P 1,143.00
b
Dishonored note, interest, and protest fee…. . 3, 050.83
Error in check record-check No. 661 for
d
P 1,242.50 entered as P 1,224.50………….. . 180.00
Bank service charges…………………………… e. 39.43 4,251.26
Corrected book balance……………………………………. P 15,751.32

Answer: B

2.
3. Substantive Audit of Receivables
Solution: (1)
Progress Billings P 84,375
Less: Accounts Receivable 30,000
Amount Collected P 54,375 Answer: A
Less: Bank Deposits 50,000
Cash collected not yet deposited P 4,375

Solution: (2)
Let TC = Total Cost
P 93,750- P 15,000 x ( 900,000 - TC ) = P 15,000
 TC
TC = P 756,000 Answer: D
Estimated Total Income = P 900,000 - P 756,000
= P 144,000
Answers:
4. 1. D 2. C 3. D 4. A

Supporting Computation: Solsons Company

Per Audit
Unit Price Amount
Item
s Quantity (LCM) Amount Per Client
A 360 units P 3.60/doz. P 108.00 P 1,310.4
11
B 24 units P 4.70 each 2.80 112.80
46
C 28 units 16.50 each 2.00 1,353.00
22
D 43 units 5.15 each 1.45 176.80
3,24
E 400 units 9.10 each 0.00 3,640.00
1,68
F 70 doz. 2.00 each 0.00 140.00
12,54
G 95 grosses 132/gross 0.00 13,780.00

Total P 18,364.25 P 20,513.00

Substantive Audit of Inventories

 1. 360 units/ 12 x P 3.60/doz = P 108
2. 400 units x 8.10 = P 3,240
3. 28 units x 16.50 = P 462
4. P 108.00 + 112.80 + 462.00 + 221.45 + 3,240.00 + 1,680.00 +12,540 = P 18,364.25

5. Substantive Audit of Inventories

Merchandise Inventory, January 1 P 60,000
Add: Net Purchases, January 1 to October 1
Purchases 415,000
Transportation - In 10,000
Total Purchases 425,000
Less:Purchase Returns and Allowances 500 420,000
Total Cost of Goods Available for Sale P 480,000
Less: Cost of Goods Sold ( 540,000 / 135% ) 400,000
Merchandise Inventory, Oct. 31 before the
fire P 80,000
Merchandise Inventory undamaged from fire 42,000
Merchandise Inventory lost from fire P 38,000

Answer: A
6. Substantive Audit of Inventories

Solution: Greg, Inc.

a. Pretax income reported for 20X6 ( 60,00/60% ) P 100,000

Add: Understatement of reported ending inventory
( P 40,000 - P 20,000) 20,000
Correct pretax income for 20X6 20,000
Less: Income tax expense ( 40% ) (48,000)
Correct net income for 20X6 P 72,000

b. Pretax income reported for 20X7 ( P 66,000 /60% ) P 110,000

Less: Understatement of reported beginning inventory
( P 40,000 - P 20,000) (20,000)
Correct pretax income for 20X7 90,000
Less: Income tax expense ( 40% ) (36,000)
Correct net income for 20X7 P 54,000

c. Correct retained earnings, December 31, 20X6 72,000

d. Correct retained earnings, December 31, 20X6 P 72,000

Add 20X7 net income 54,000
Correct retained earnings, December 31, 20X7 P 126,000

7. Substantive Audit of Investments in Debt/Equity Financial Instruments

Answers:
1. C 2. A 3. B 4. A 5. A

Supporting Computation: Fiesta Company

P 7,200,000 P 2,100,000
180,000
900,000
P 7,485,000
x 25% 1,871,250
P 228,750 (1)

Cash dividends P 315,000

 x 25%
Investment revenue P 78,750 (2)

Share of net income ( P 1,620,000 x 25% x 6/12 ) P 202,500

Depreciation adjustment ( P 180,000 x 25% =
P 45,000 / 10 * 6/12 ) (200,250)
Investment revenue, as adjusted (3) P 200,250

The undervaluation of land does not affects Fiesta Company's share of profit because it is
nondepreciable

Acquisition cost P 2,100,00

Share of net income, as adjusted 200,250
Cash dividends received ( P 315,000 x 25% ) (78,750)
Carrying value, Dec. 31, 20X7 - equity method (4) P 2,221,500

The share investment should be carried at its fair value of P 2,375,000 ( P 9.5 million x 15% ) on
December 31, 20X7.

The year-end adjustment is:

Investment in available-for-sale securities 275,000

Unrealized holding gain on 275,000
available-for-sale securities-equity

Cost P 2,100,000
Fair value ( P 0.5 million x 25% ) 2,375,000
Fair value adjustment (5) P (275,000)

1.
2.
3.
4.
5.
6.
7.
8. Substantive Audit of Property, Plant and Equipment
 Supporting Computation:

Price of the machine P 50,000

Cash discount (1,000)
Freight charges 350
Installation cost 1,020
Cost of machine purchased P 50,370
Cost of machine per records of company 49,870

Increase in Machinery account P 500

Answer: B

9. Substantive Audit of Property, Plant and Equipment

Supporting Computation: Beth Company

Sales price P 2,934,000

Less: First Payment 500,000
Balance P 2,434,000

Interest Income ( P 2,434,000 x 10% x 9/12 ) P 182,500

Answer: B

10. Substantive Audit of Property, Plant and Equipment

a. Repair and Maintenance Expense 12,000

Options Expense 2,000
Building 3,500
Gain on sale of building 17,500
To correct the building account.

b. After adjustment, the cost of the building is P 230,000: P 226,500. Building account
balance before adjustment, plus P 3,500 from the adjustment in (a), consisting of
the P 225,000 contract price plus the P 5,000 option.
 1. Straight-line depreciation = 1/2 P 230,000 - P 80,000 = P 3,750
20 years

2. Sum-of-the-Year’s- 20 x ( P 230,000 – P 80,000 = P 7,143

Digits depreciation = 1/2 210

3. Double-declining
balance depreciation = ½ (10% x P 230,000) = P 11,500

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11. Substantive Audit of Intangible Assets

Answer: A

Supporting Computation: Plaza Company

Attorney’s fees in connection with the organization of Plaza P 4,000

Meeting of incorporators, filing fees and other
organization expense 5,000
Total Organization Expense to be charged to
income in 20X7 P 9,000

12. Substantive Audit of Other Noncurrent Investments

Supporting Analysis:

1. Purchase of equipment

Leased equipment 10,000

Cash 10,000
2. Lease signing and receipt of first lease payment
 With an operating lease, no journal entry is made on the lease signing date on
the lessor’s books except to record the receipt of cash.

Receipt of first lease payment

Cash 2,600
Lease Revenue 2,600

3. Depreciation of leased equipment

Depreciation Expense on Leased Equipment 2,000

Accumulated Depreciation on Leased Equipment 2,000

Depreciation Expense: P 10,000 / 5 years = P 2,000

13. Substantive Audit of Owner’s Equity

Answer: B

Supporting Computation: Analen Corporation

Shareholders ‘ Equity
Share capital, Ordinary P 200,000
Premium on Ordinary Shares 40,000
Retained Earnings 150,000
Total P 390,000
Less: Treeasury Shares @ cost 39,000
Balance P 351,000

14. Substantive Audit of Owner’s Equity

 Answer: A

Supporting Computation: Chris Corporation

Amount to be credited to the ordinary shares account:

= 5, 000 preference shares x 3 x P 25

=375,000

15. Substantive Audit of Owner’s Equity

Answer: D

Supporting Computation: Medina Corporation

Capital in excess of par value, Jan. 1, 20X7 P 140,000

Add (Deduct) transactions affecting this account :
Sale of treasury shares above costs
Sales price ( 600 x P38 ) P 22,800
Cost of treasury shares ( 600 x P 32 ) 21,000 1,800
Retirement of remaining shares
Cost of treasury shares ( 400 x P 32 ) P 14,000
Par value ( 400 x P 20) 8,000 (6,000)
Capital in excess of par value, Dec. 31, 20X7 P 135,800