Auditing Problems1

CEBU CPAR CENTER, INC. Auditing Problems 1st Pre-board (July 23, 2007) PROBLEM 1 – Problem 2 Audit of Cash Your examination of the financial statements of MAGDALO Group Co. for the year ended December 31, 2007 you obtained the following information on the checking account of the company: a. The bank statement on November 30, 2007 showed a balance of P15,300. b. Among the bank credits in November was a customer’s note for P5,000 collected for the account of the company which the company recognized in December among its receipts. c. Included in the bank debits in November was a cost of checkbooks amounting to P60. d. A check for P2,000 issued by MAGULO Group Co. in November was charged by the bank in error against MAGDALO Group Co. account. e. You also ascertained that there were deposits in transit amounting to P4,000 and outstanding checks totaling P8,500 as of November 30, 2007. f. The bank statement for the month of December showed total credits of P20,800 and total charges of P10,200. g. Company books for December showed total receipts of P36,780 and disbursements of P20,360. h. Bank debit memos for December were: No. 418 for service charges, P80 and No. 504 on a customer’s returned check marked “Refer to Drawer” for P1,200. i. On December 29, 2007 the company placed with the bank a customer’s promissory note with a face value of P6,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January, 2007. j. A check for P198 was recorded in the company cash payments books in December as P1,980. 1. Adjusted cash balance as of December 31, 2007. a. P24,280 b. P36,880 c. P18,782 2. Unadjusted book balance November 30, 2007. a. P12,800 b. P7,800 c. P12,860 3. Adjusted cash balance November 30, 2007. a. P8,800 b. P12,800 c. P21,300 4. Deposit in transit as of December 31, 2007. a. P21,980 b. P10,980 c. P8,890 5. Outstanding Checks as of December 31, 2007. a. P19,940 b. P16,818 c. P19,880

d. P16,940

e. other amount

d. P7,860

e. other amount

d. P10,800

e. other amount

d. P16,980

e. other amount

d. P18,098

e. other amount

PROBLEM 2 – Problem 5 Audit of Cash Bioflu Company has a current account in Metrobank. Your audit of the company’s cash account reveals the following: a. Balances taken from the company’s general ledger: Cash balance, November 30, 2007 P637,860 Cash balance, December 31, 2007 576,420 Receipts, December 1-31, 2007 306,220 b. Outstanding checks, November 30, 2007 (P26,140 was paid by bank in December) 64,140 c. Checks written and recorded in December; not included in the checks returned with the December bank statement 36,080 d. Deposit in transit, November 30, 2007 15,260 e. Deposit in transit, December 31, 2007 16,140 f. A bank credit memo was issued in December to correct an erroneous charge made in November 1,500 g. Note collected by bank in December (company was not informed of the collection) 2,060 h. A check for P2,020 (payable to a supplier) was recorded in the Check Register in December as P3,000 980 i. A check for P2,240 was charged by the bank as P2,420 in December 180 j. Bioflu Company issued a stop payment order to the bank in December. This pertains to a check written in December which was not received by the payee. A new check was written and recorded in the Check Register in December. The old check was written off by a journal entry, also in December 780

k. Bank service charge, November 30, 2007 6. The total outstanding checks on December 31, 2007, should be: a. P38,000 b. P74,080 c. P36,080 7. What is the bank statement balance on November 30, 2007? a. P684,400 b. P587,420 c. P685,180 8. What is the bank statement balance on December 31, 2007? a. P636,440 b. P637,220 c. P637,580 9. The total bank receipts for the month of December should be: a. P309,680 b. P304,000 c. P308,900 10. The total bank disbursements for the month of December is: a. P356,080 b. P356,860 c. P357,640

60 d. P62,220

e. other amount

d. P688,180

e. other amount

d. P637,160

e. other amount

d. P308,120

e. other amount

d. P356,200

e. other amount

PROBLEM 3 – Problem 13 Audit of Cash You were engaged to audit the books of accounts of E Enterprise for the year ended December 31, 2007. From the records of the Co. you gathered the following information: E Enterprises started operation on October 2, 2007 with E investing P200,000 cash. Monthly bank reconciliation statements have not been prepared for 2007; however, bank statements for October, November, and December were made available to you. Your analysis of these bank statements revealed total bank credits (deposits) of P1,140,000 including, E’s initial investment and bank loan, details of which are in the additional data. The bank statement in December, 2007 showed an ending balance of P60,760. Examination of the paid checks disclosed that checks totaling P9,000 were issued by the Co. in December, 2007and were presented for payment only in January, 2008. Cash count of the Cashier’s accountability amounted to P12,600. You were told by the Cashier that P10,000 of these, in checks, were cash sales on December 29, 2007, deposited on Jan. 3, 2008. The balance, in currency and coins, represents Petty Cash Fund. Additional data: 1. Accounts receivable subsidiary ledger had a total balance of P140,000 at December 31, 2007. P10,000 of this was estimated to be uncollectible. 2. Supplier’s unpaid invoices for merchandise totaled P30,000; while an account for store fixtures bought on October 2, 2007 for P100,000 had an unpaid balance of P10,000. Fixtures are depreciated at 10% per annum. 3. Merchandise inventory at December 31, 2007 amounted to P60,000. 4. The bank statement in October showed a bank credit for P190,000 dated October 2, 2007. Inquiry from the Cashier disclosed that the amount represents proceeds of a 90-day, 20% discounted bank note. P160,000 of this loan was paid by check in December, 2007. 5. Operating expenses paid during the period totaled P351,500; while merchandise purchases amounted to P500,000. REQUIRED: 11. Petty cash fund as of December 31, 2007. a. P12,600 b. P5,000 c. P11,600 12. Adjusted cash balance per bank. a. P61,760 b. P51,760 c. P60,760 13. Total sales in 2007. a. P902,600 b. P910,000 c. P900,000 14. Total cash paid to suppliers for merchandise purchases. a. P500,000 b. P470,000 c. P530,000 15. Cost of sales in 2007. a. P560,000 b. P530,000 c. P440,000 16. Total operating expense in 2007. a. P371,500 b. P363,750 c. P364,000 17. Bad debts expense in 2007. a. P10,000 b. P5,000 c. P20,000 18. Depreciation expense in 2007. a. P10,000 b. P2,500 c. P5,000 19. Net income in 2007. a. P98,600 b. P96,000 c. P86,000

d. P2,600 d. P70,760 d. P890,000 d. P560,000 d. P500,000 d. P351,500 d. P0 d. P2,250 d. P106,000

20. Cash shortage as of December 31, 2007. a. P14,140 b. P16,740

c. P4,140

d. P6,740

PROBLEM 4 – Problem 8 Correction of Errors You have been engaged to prepare audited financial statement figures for BOURNE, Inc. The records are in agreement with the following balance sheet: BOURNE, INC. Balance Sheet December 31, 2007 Assets Liabilities and Capital Cash P10,000 Accounts Payable P10,000 Accounts receivable 12,000 Notes Payable 3,000 Notes receivable 13,000 Common Stock 20,000 Inventory 25,000 Additional paid-in capital 40,000 Equipment- net 40,000 Retained Earnings 27,000 P100,000 P100,000 A review of the records of the corporation indicates that the errors and omissions listed in the table below had not been corrected during the applicable years: Inventory Inventory Depreciation Prepaid Unearned Accrued December 31 Overstated Understated Expense Expense Income Expense 2004 --P6,000 P250 P900 --P200 2005 P7,000 --500 700 P400 75 2006 8,000 --150 500 --100 2007 --9,000 350 600 300 50 The net income according to the records is: 2005, P7,500; 2006, P6,500; and 2007, P5,500. No dividends were declared during these years, and no adjustments were made to retained earnings. Ignoring income tax effects, answer the following questions: 21. Adjusted net income/(net loss) for 2005: a. P (6,475) b. P 225

c. P (6,225)

d. P 775

22. Adjusted net income/(net loss) for 2006: a. P 6,025 b. P (1,475)

c. P 5,525

d. P (8,475)

23. Adjusted net income/(net loss) for 2007: a. P 22,000 b. P 14,000

c. P 6,000

d. P 22,150

24. What is the effect of these errors on the net working capital at the end of 2007? a. P 8,000 understated c. P 16,850 understated b. P 8,900 understated d. P 9,250 understated 25. What is the adjusted balance of the stockholders’ equity at December 31, 2007? a. P 95,000 b. P 95,900 c. P 103,850

d. P 96,250

PROBLEM 5 – Problem 9 Correction of Errors The partnership of King, Queen and Prince engaged you to audit its accounting records. Some accounts are on the accrual basis and others are on the cash basis. The partnership’s books were closed at December 31, 2007 by the bookkeeper who prepared the general ledger trial balance that appears below. King, Queen and Prince GENERAL LEDGER TRIAL BALANCE December 31, 2007 Cash Accounts receivable Inventory Land

Debit P 100,000 400,000 260,000 90,000

Credit

Buildings Accumulated depreciation- buildings Equipment Accumulated depreciation- equipment Goodwill Accounts payable Allowance for future inventory losses King, capital Queen, capital Prince, capital Totals

500,000 P 20,000 560,000 60,000 50,000

. P1,960,000

550,000 30,000 600,000 400,000 300,000 P1,960,000

Your inquiries disclosed the following: 1. The partnership was organized on January 1, 2006 with the partners making equal amount of contributions. The initial partnership agreement calls for an equal distribution of profit or loss among the partners. The partnership agreement was amended effective January 1, 2007 to provide for the following profit and loss ratio: King, 50%; Queen, 30%; and Prince, 20%. The amended partnership agreement also stated that the accounting records were to be maintained on the accrual basis and that any adjustments necessary for 2006 should be allocated according to the 2006 distribution of profits.

2. The following amounts were not recorded: December 31 2007 December 31 2006 Prepaid insurance P7,000 P 6,500 Advances from customers 2,000 11,000 Accrued interest expense 4,500 The advances from customers were recorded as sales in the year the cash was received. 3. In 2007 the Partnership recorded a provision of P30,000 for anticipated declines in inventory prices. You convinced the partners that the provision was unnecessary and should be removed from the books. 4. The partnership charged equipment purchased for P44,000 on January 3, 2007 to expense. This equipment has an estimated life of ten years and an estimated salvage value of P4,000. The partnership depreciates its capitalized equipment under the straight-line depreciation method.

5. The partners agreed to establish an allowance for doubtful accounts at two percent of current accounts receivable and five percent of past due accounts. At December 31, 2006 the partnership had P540,000 of accounts receivable, of which only P40,000 was past due. At December 31, 2007 fifteen percent of accounts receivable was past due, of which P40,000 represented sales made in 2006, and was generally considered collectible. The partnership had written off uncollectible accounts in the year the accounts became worthless as follows: 2007 accounts 2006 accounts

Accounts Written Off in 2007 2006 P 8,000 10,000 2,500

6. Goodwill was recorded on the books in 2007 and credited to the partners’ capital accounts in the profit and loss ratio in recognition of an increase in the value of the business resulting from improved sales volume. 7. No other capital transactions took place in 2006 and 2007. 8. Ignore tax implications. Based on the above information, answer the following: 26. The net income of the partnership in 2007, before adjustment is: a. P1,000,000 b. P980,000 c. P950,000

d. P920,000

27. The capital balance of King on January 1, 2007 before adjustment is: a. P100,000 b. P125,000 c. P300,000

d. P600,000

28. The capital balance of Queen on December 31, 2007 before adjustment is: a. P410,860 b. P374,140 c. P385,000

d. P400,000

29. What is the effect on 2007 net income of the omission of prepaid insurance, advances from customers, and accrued interest expenses in 2006 and 2007? a. P9,000 understated b. P9,000 overstated c. P5,000 understated d.P14,000 understated 30. What is the carrying value of equipment on December 31, 2007? a. P600,000 b. P540,000 c. P544,000

d. P604,000

31. What should be the balance of the allowance for uncollectible accounts at December 31, 2007? a. P9,800 b. P12,000 c. P15,800 d. P14,500 32. How much is the uncollectible account expense that should have been recognized in 2006? a. P24,500 b. P14,500 c. P12,000 d. P9,500 33. The adjusted net income in 2007 is: a. P1,086,200 b. P1,027,200

c. P1,008,200

d. P1,036,200

34. What should be the capital balance of Prince at December 31, 2007? a. P310,240 b. P300,240 c. P317,240

d. P307,240

35. What is the adjusted capital balance of Queen on January 1, 2007? a. P107,000 b. P89,667 c. P93,000

d. P79,000

36. By how much would the 2006 net income be misstated, if no adjustments were made for the above errors? a. P31,000 overstated b.P31,000 understated c. P21,000 overstated d.P21,000 understated 37. The adjusted partners’ equity on December 31, 2007 is: a. P1,315,200 b. P1,336,200 c. P1,306,200

d. P1,365,200

PROBLEM 6 – Problem 5 Correction of Errors You were first appointed auditor of the Pringles Corporation in 2007. You completed the audit for 2007 and prepared audited financial statements directly from the audit working papers. You have returned to make the 2008 audit and discovered that the client’s bookkeeper failed to record the adjusting entries you made in 2007 audit working papers, which entailed adjustments for the following items: 1. 2. 3. 4.

The December 31, 2007 inventory was understated by P5,000. No entry was made for accrued utilities expense of P2,500 as of year end. Ordinary motor repairs of P3,200 were charged to Accumulated Depreciation during 2007. The Company failed to record the provision for uncollectible accounts in the amount of P6,000.

Your examination of the 2008 entries in the accounts uncovered the following: 1. An expenditure of P10,000 for repairs of office equipment had been charged to Furniture and Equipment. The Company records depreciation at 10% of the December 31 balance of the Property and Equipment accounts. 2. A 2007 account receivable in the amount of P4,000 had been written off as uncollectible by a charge to Retained Earnings. 3. Salesmen’s commission includes P2,400 paid on undelivered customers’ orders. Additional data: 1. The audited statement of 2007 showed a net income of P250,000. 2. The unadjusted net income for 2008 is P320,000. 38. The unadjusted net income for the year 2007 is: a. P 253,500 b. P 256,700 c. P 263,700 d. P 261,700 39. By how much would the December 31, 2008 retained earnings be misstated if no adjustments were made for the above errors? a. Retained earnings overstated by P11,800. c. Retained earnings overstated by P15,800. b. Retained earnings overstated by P12,800. d. Retained earnings overstated by P16,800. 40. The adjusted net income for the year 2008 is:

a. P 315,900

b. P 308,400

c. P 314,900

d. P 310,900

41. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor would probably – Problem 3 Audit of Inventory a. Increase the extent of tests of controls of the inventory cycle. b. Request the client to schedule the physical inventory count at the end of the year. c. Insist that the client perform physical counts of inventory items several times during the year. d. Apply gross profit tests to ascertain the reasonableness of the physical counts. 42. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items – Problem 7 Audit of Inventory a. Included in the listing have been counted. b. Represented by inventory tags are included in the listing. c. Included in the listing are represented by inventory tags. d. Represented by inventory tags are bona fide. 43. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? – Problem 12 Audit of Inventory a. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets b. Credit memos for several items returned by customers had not been recorded c. No journal entry had been made on the retailers books for several items returned to its suppliers d. An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had not been reflected in the perpetual records 44. Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following suggests to the auditor that the client’s goods have been shipped on consignment? – Problem 19 Audit of Inventory a. Numerous shipments of small quantities b. Numerous shipments of large quantities and few returns c. Large debits to accounts receivable and small periodic credits d. Large debits to accounts receivable and large periodic credits 45. Purchase cutoff procedures should be designed to test whether all inventory – Problem 6 Audit of Inventory a. Purchased and received before year-end was paid for b. Ordered before year-end was received c. Purchased and received before year-end was recorded d. Owned by the company is in the possession of the company at year-end

AUDITING PROBLEMS 1 2 3 4 5 6 7 8 9 10

C D B B D B C B D A

11 12 13 14 15 16 17 18 19 20

D A C B C C A B C A

21 22 23 24 25 26 27 28 29 30

A C A D A C A D D B

31 32 33 34 35 36 37 38 39 40

A B D B C C A B A A

41 42 43 44 45

B B B C C