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Central Luzon State University

College of Business Administration and Accountancy
Department of Accountancy

ACCTG 4230 – IAR in Auditing and Assurance: Concepts and Applications Janssen Tongco
Exercises: Audit of Investing Cycle I March 8, 2023

Instruction: Determine the correct answer. There are only 40 questions. Independently answer this handout in
100 minutes only. Place your answers in the related Google Form. For the open-ended problems, don’t place
the currency, decimal places, comma, space or any additional character. Just input the amount, unless
otherwise stated. Round-off to the nearest peso, if necessary.

PROBLEM NO. 1
Your audit of Ashley Corporation for the year 2017 disclosed the following property dispositions:

Cost Acc. Dep. Proceeds Fair value Mode

Land P3,200,000 - 2,480,000 2,480,000 Condemnation
Building 1,200,000 - 288,000 - Demolition
Warehouse 5,600,000 880,000 5,920,000 5,920,000 Destruction by fire
Machine 640,000 256,000 72,000 576,000 Exchange
Delivery truck 800,000 380,000 376,000 376,000 Sale

Land
On January 15, a condemnation award was received as consideration for the forced sale of the company’s land
and building, which stood in the path of a new highway.

Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was allocated to the
building on the corporate books. The real estate was acquired with the intention of demolishing the building,
and this was accomplished during the month of August. Cash proceeds received in September represent the net
proceeds from demolition of building.

Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2, 2004. On
December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost
of P4,800,000.

Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000 and cash of
P72,000 was received.

Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

QUESTIONS:
Based on the above and the result of your audit, compute the gain or (loss) to be recognized for each of the
following property dispositions. Enclose the amount with a parenthesis if it is a loss.

1. Land

2. Building

3. Warehouse

4. Machine

5. Delivery truck

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PROBLEM NO. 2
On an audit engagement for 2017, you handled the audit of fixed assets of Xander Mines. This mining company
bought the exploration rights of Harisson Mineral Exploration on June 30, 2017 for P29,160,000. Of this purchase
price, P19,440,000 was allocated to copper which had remaining reserves estimated at P6,480,000 tons. Xander
Mines expects to extract 60,000 tons of ore a month with an estimated selling price of P50 per ton. Production
started immediately after some new machineries costing P2,400,000 were bought on June 30, 2017. These new
machineries had estimated useful life of 15 years with a scrap value of 10% of cost after the ore estimate has been
extracted from the property, at which time the machineries will already be useless. Among the operating
expenses of Xander Mines at December 31, 2017 were:

Depletion expense P1,620,000

Depreciation on machineries 160,000

QUESTIONS:
Based on the above and the result of your audit, answer the following:

6. Recorded depletion expense was

a. Overstated by P360,000 c. Overstated by P540,000
b. Understated by P360,000 d. Understated by P540,000

7. Recorded depreciation expense was

a. Overstated by P40,000 c. Overstated by P80,000
b. Understated by P40,000 d. Understated by P80,000

PROBLEM NO. 3
One of the cash-generating units of Lucas Corporation is that associated with the manufacture of wine barrels.
At 31 December 2016, Lucas Corporation believed, based on analysis of economic indicators, that the assets of
the unit were impaired. The carrying amounts of the assets of the unit at 31 December 2016 were:

Buildings P 420,000
Accumulated depreciation – buildings
(Depreciated at P 60,000 per annum) (180,000)
Factory machinery 220,000
Accumulated depreciation – machinery
(Depreciated at P 45,000 per annum) (40,000)
Goodwill 15,000
Inventory 80,000
Receivables 40,000
Allowance for doubtful debts (5,000)
Cash 20,000

Lucas Corporation determined the value in use of the unit to be P535,000. The receivables were considered to be
collectible, except those considered doubtful.

During 2017, Lucas Corporation increased the depreciation charge on buildings to P 65,000 per annum, and to
P50,000 per annum for factory machinery. The inventory on hand at 31 December 2016 was sold by the end of
2017. At 31 December 2017, Lucas Corporation, due to a return in the market to use of traditional barrels for
wines and an increase in wine production, assessed the recoverable amount of the cash-generating unit to be
P20,000 greater than the carrying amount of the unit.

QUESTIONS:
Based on the above and the result of your audit, answer the following:

8. How much is the carrying amount of buildings at 31 December 2016 after allocating impairment loss?

9. How much is the carrying amount of factory machinery at 31 December 2016 after allocating impairment
loss?

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10. How much is the carrying amount of buildings at 31 December 2017 after the reversal of impairment loss?

11. How much is the carrying amount of the factory machinery at 31 December 2017 after the reversal of
impairment loss?

PROBLEM NO. 4
Carys Corporation has a nuclear power plant and a related decommissioning liability. The nuclear power plant
started operating on 1 January 2014. The plant has a useful life of 40 years. Its initial cost was P 120 million; this
included an amount for decommissioning costs of P 10 million, which represented estimated cash flows payable
in 40 years discounted at a risk-adjusted rate of 5 percent. The entity’s financial year ends on 31 December.

The entity adopts the revaluation model on 31 December 2016. A market-based discounted cash flow valuation
of P 115 million is obtained at 31 December 2016. It includes an allowance of P 11.6 million for decommissioning
costs, which represents no change to the original estimate, after the unwinding of three years’ discount.

On 31 December 2017, the decommissioning liability (before any adjustment) is P 12.2 million and the discount
rate has not changed. However, on that date, the entity estimates that, as a result of technological advances, the
present value of the decommissioning liability has decreased by P 5 million.

The entity decides that a full valuation of the asset is needed at 31 December 2017, in order to ensure that the
carrying amount does not differ materially from fair value. The asset is now valued at P 107 million, which is net
of an allowance of P 7.2 million for the reduced decommissioning obligation that should be recognized as a
separate liability.

The entity does not transfer realized surplus directly to retained earnings.

QUESTIONS:
Based on the above and the result of your audit, answer the following. Determine the required amount in millions
with 2 decimal places. No need to place the word “million” for every answer.

12. The carrying amount of the power plant as of 31 December 2016 prior to revaluation is:

13. The entity should report revaluation surplus as of 31 December 2016 at

14. The depreciation amount to be reported for the year ended December 31, 2017 is

15. The finance cost to be reported for the year ended December 31, 2017 is

16. The entity should report revaluation surplus as of 31 December 2017 at

PROBLEM NO. 5
Wendell Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements
for its year’s operations were not examined by a CPA. You have been engaged to examine the financial
statements for the year ended 31 December 2017, and your examination is substantially completed. The
corporation’s adjusted trial balance appears as follows:

WENDELL MANUFACTURING CORPORATION

Adjusted Trial Balance
December 31, 2017

Debits Credits
Cash P 110,000
Accounts receivable 685,000
Allowance for doubtful accounts P 5,000

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 Inventories 385,000
Machinery 750,000
Equipment 290,000
Accumulated depreciation 100,000
Patents 1,020,000
Prepaid expenses 105,000
Organization costs 290,000
Goodwill 240,000
Licensing agreement 1 500,000
Licensing agreement 2 590,000
Accounts payable 1,475,000
Unearned revenue 125,000
Share capital 3,170,000
Retained earnings, 1/1/2017 170,000
Sales revenue 6,685,000
Cost of goods sold 4,540,000
Selling and general expenses 1,730,000
Interest expense 35,000
Loss on typhoon 120,000
Totals P 11,560,000 P 11,560,000

The following information relates to accounts that may still require adjustment:

a. Patents for Wendell’s manufacturing process were acquired in January 2, 2017 for P 680,000. An additional
P 340,000 was spent in December 2017 to improve machinery covered by the patents and was debited to
the patents account. Depreciation on operational assets has been properly recorded for 2017 in accordance
with Wendell’s practice, which provides a full year’s depreciation for property on hand as of June 30 and
no depreciation otherwise. Wendell uses the straight-line method for all depreciation and amortization.

b. The balance in the organization costs included costs incurred during the organization period. Wendell has
exercised its option to amortized organization costs over a five-year period beginning January 1, 2016, for
income tax purposes and will amortize these costs for accounting purposes in the same manner. No
amortization has yet been reported.

c. On January 3, 2016, Wendell purchased licensing agreement 1, which was believed to have a 20-year useful
life. The balance in the licensing agreement 1 account includes its purchase price of P 480,000 and costs of P
20,000 related to the acquisition. On January 1, 2017, Wendell bought licensing agreement 2, which has a
life-expectancy of 10 years. The balance in the licensing agreement 2 account included the P 580,000
purchase price and P 20,000 in acquisition costs, but it has been reduced by a credit of P 10,000 for the
advance collection of 2018 revenue from the agreement. No amortization agreement 2 has been recorded.

In early 2017, an explosion caused a permanent 60 percent reduction in the expected revenue-producing
value of licensing agreement 1. No entries have been made during 2016 or 2017 amortization or for the
explosion in 2017.

d. The balance in the goodwill account includes (1) P 80,000 paid December 30, 2016, for an advertising
program that management believes will assist in increasing Wendell’s sales over a period of three to five
years following the disbursement and (2) legal expenses of P 160,000 incurred for Wendell’s incorporation
on January 3, 2016. No amortization has ever been recorded in the goodwill.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted carrying amount of the following as of
December 31, 2017:

17. Patents

18. Organization Costs

19. Licensing Agreement 1

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20. Licensing Agreement 2

21. Goodwill

PROBLEM NO. 6
On December 31, 2016, Winnie Corporation acquired the following three intangible assets:

• A trademark for P 450,000. The trademark has 7 years remaining legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely, without problem.

• Goodwill for P 2,250,000. The goodwill is associated with Winnie’s Oyster Sauce Manufacturing
reporting unit.

• A customer list for P 330,000. By contract, Winnie has exclusive use of the list for 5 years. Because of
the market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2017, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just P
15,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon.

b. The cash flows expected to be generated by the Oyster Sauce Manufacturing reporting unit is P
375,000 per year for the next 22 years. Carrying amounts and fair values of the assets and liabilities of
the Oyster Sauce Manufacturing reporting unit are as follows:

Carrying
amount Fair values
P P
Identifiable assets 4,050,000 4,050,000
Goodwill 2,250,000 ?
Liabilities 2,700,000 2,700,000

c. The cash flows expected to be generated by the customer list are P 180,000 in 2018 and P 120,000 in
2019.

QUESTIONS:
Based on the above and the result of your audit, determine the following. Assume that the appropriate discount
rate for all items is 6%. Round of present value factors to 4 decimal places.

22. Total amortization for the year 2017

23. Impairment loss for the year 2017

24. Carrying amount of the Trademark as of December 31, 2017

25. Carrying amount of the Goodwill as of December 31, 2017

26. Carrying amount of the Customer list as of December 31, 2017

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PROBLEM NO. 7
Select the best answer for each of the following:

27. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed
by the auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable c. Depreciation expense
b. Gain on disposal of equipment d. Repair and maintenance expense

28. When an auditor interviews the plant manager, he will most likely seek from the plant manager
information regarding
a. Deferral of procurement of certain necessary insurance coverage.
b. Adequacy of the provision for uncollectible accounts.
c. Appropriateness of physical inventory observation procedures.
d. Existence of obsolete machinery.

29. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Analysis of the debits to the accumulated depreciation account.
b. Review of insurance policy riders.
c. Review of the purchase return and allowance account.
d. Review of depreciation.

30. In auditing intangible assets, an auditor most likely would review or recompute amortization and
determine whether the amortization period is reasonable in support of management’s financial statement
assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights and obligations.

31. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
a. The inherent risk is usually low.
b. The depreciated values are always smaller than cost.
c. The amounts recorded on the balance sheet for most companies are immaterial.
d. Internal control is inherently effective regarding this account.

32. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
a. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property.
b. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property.
c. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds.
d. Confirmation with the title company that handled the escrow account and disbursement of proceeds
for the closing of the property.

33. When few property and equipment transactions occur during the year the continuing auditor usually
obtains and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. Extensive tests of current year property and equipment transactions.
d. A thorough examination of the balances at the beginning of the year.

34. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
b. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
c. Expenditures for property and equipment have not been charged expense.
d. Expenditures for property and equipment have been recorded in the proper period.

35. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this when
a. Examining construction work orders that support items capitalized during the year.
b. Discussing capitalization policies with Coatsen's controller.
c. Examining maintenance expense accounts.
d. Observing that the warehouse had been painted.

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36. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence
about fixed asset addition?
a. Recomputing calculations and obtaining written management representations.
b. Observing operating activities and comparing balances to prior period balances.
c. Inspecting documents and physically examining assets.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.

37. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely
to be detected by the audit procedures specified?
a. Necessary facility maintenance has not been performed.
b. Insurance coverage on the facility has lapsed.
c. Depreciation expense on fully depreciated machinery has been recognized.
d. Overhead has been overapplied.

38. In testing for unrecorded retirements of equipment, an auditor is most likely to

a. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
b. Select items of equipment from the accounting records and then locate them during the plant
tour.
c. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.

39. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.

40. The auditor may conclude that depreciation charges are insufficient by noting
a. Continuous trade-in of relatively new assets.
b. Excessive recurring losses on assets retired.
c. Insured values greatly in excess of book values.
d. Large numbers of fully depreciated assets.

-end-

Leftovers Again?

Your brain is divided into two halves. The left half is more
number-oriented, rational, and concrete. Your right half is
more creative, playful, and artistic. To solve this puzzle, you'll
have to borrow a little from both sides of your brain.

In an art class, students are taught how to shape a 1 ounce bag

of clay into a small statue. During this process, some clay
remains unused (actually, it falls to the floor). For every five
statues that are made, there is enough extra clay to make one
more statue. Suppose a student is presented with 25 ounces
of clay. What is the maximum number of statues he can
sculpt? 31