Professional Documents
Culture Documents
Manila, Philippines
Accounting 13;
Applied Auditing
11:30 am to 2:30 pm
Name: _____________________________________
(Last name, First Name, Middle Initial)
Score: _____________________________________
Instructions: Encircle the letter of the best answer for multiple choice questions and compute for the correct answer
or write the required items for auditing problems.
Problem #1
The following are selected unadjusted account balances and adjusting information of TANYING CORP. for the
year ended December 31, 2017.
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
Ordinary shares outstanding 117,000
Adjusting information:
(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance ....................................................................................................................... 2%
(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in) ...................................................................................... 6%
(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day .................................................................................................................................. P9,180
Average sales commissions as a percent of sales ........................................................................................ 3%
(e) No accrual had been made for a freight bill received on January 2, 2018, for
goods received on December 29, 2017 ................................................................................................. P1,710
(f) An advertising campaign was initiated November 2, 2017. This amount was
recorded as Prepaid advertising and should be amortized over a six-month
period. No amortization was recorded ................................................................................................. P5,454
Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2017 ..............................................................................................................P10,500
(h) Depreciation expense on a new forklift purchased March 1, 2017, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price ....................................................................................................................................P23,400
Estimated life in years ................................................................................................................................ 10
(i) A real account is debited upon the receipt of office supplies. Office supplies on hand at
year-end.............................................................................................................................................. P3,675
1. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
5.Net income
A. P237,296 B. P210,299 C. P250,289 D. P216,296
Problem #2
The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY as of December
31, 2017:
During your audit, you noted that Bunching Company held its cash books open after year-end. In addition, your audit
revealed the following:
1. Receipts for January 2018 of P654,600 were recorded in the December 2017 cash receipts book. The receipts of
P360,100 represent cash sales and P294,500 represent collections from customers, net of 5% cash discounts.
2. Accounts payable of P372,400 was paid in January 2018. The payments, on which discounts of P12,400 were
taken, were included in the December 2017 check register.
3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following information has been
found relating to certain inventory transactions:
a. The invoice for goods costing P175,000 was received and recorded as a purchase on December 31, 2017.
The related goods, shipped FOB destination, were received on January 4, 2018, and thus were not included
in the physical inventory.
b. A P182,000 shipment of goods to a customer on December 30, 2017, terms FOB destination, are not included
in the year-end inventory. The goods cost P130,000 and were delivered to the customer on January 3, 2018.
The sale was properly recorded in 2018.
c. Goods costing P637,500 were shipped on December 31, 2017, and were delivered to the customer on January
3, 2018. The terms of the invoice were FOB shipping point. The goods were included in the 2017 ending
inventory even though the sale was recorded in 2017.
d. Goods costing P217,500 were received from a vendor on January 4, 2018. The related invoice was received
and recorded on January 6, 2018. The goods were shipped on December 31, 2017, terms FOB shipping point.
e. Goods valued at P275,000 are on consignment with a customer. These goods are not included in the inventory
figure.
f. Goods valued at P612,800 are on consignment from a vendor. These goods are not included in the physical
inventory.
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
6. Cash
7. Accounts receivable
8. Inventory
9. Accounts payable
Problem #3
BULKAN COMPANY purchased a machine for P300,000 on January 1, 2014, with the following additional items
paid or incurred:
Separation pay for laborer laid off upon acquisition of new machine.................................................. P3,600
Loss on sale of machine replaced ........................................................................................................ 3,900
Transportation in ................................................................................................................................ 3,000
Installation cost ................................................................................................................................ 12,000
The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
On January 1, 2017, new parts which cost P37,800 were added to the machine so as to reduce its fuel consumption,
but with no change in its estimated life or residual value.
10. The annual depreciation charge on the machine for 2015 was
Problem #4
The following shareholders equity accounts are included in the statement of financial position of CONDESSA CO.
on December 31, 2016.
During 2017, Condessa took part in the following transactions concerning equity.
1. Paid the annual 2016 P8 per share dividend on preference shares and a P2 per share dividend on ordinary shares.
These dividends had been declared on December 31, 2016.
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are selling for P45 per share.
6. Issued the stock dividend.
7. Declared the annual 2017 P8 per share dividend on preference shares and the P2 per share dividend on ordinary
shares. These dividends are payable in 2018.
11. What is the retained earnings balance (before appropriation for treasury shares) on December 31, 2017?
12. What amount should be reported as total shareholders equity on December 31, 2017?
Problem #5
The December 31 year-end financial statements of SAMOA COMPANY contained the following errors:
Dec. 31, 2016 Dec. 31, 2017
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------
An insurance premium of P330,000 was prepaid in 2016 covering the years 2016, 2017, and 2018. The entire amount
was charged to expense in 2016. In addition, on December 31, 2017, a fully depreciated machinery was sold for
P75,000 cash, but the sale was not recorded until 2018. There were no other errors during 2016 and 2017, and no
corrections have been made for any of the errors. Ignore income tax effects.
13. What is the total effect of the errors on Samoas 2016 net income?
A. P123,500 overstatement
B. P27,500 overstatement
C. P192,500 understatement
D. P177,500 understatement
14. What is the total effect of the errors on the amount of Samoas working capital at December 31, 2017?
A. P75,500 overstatement
B. P40,500 overstatement
C. P225,500 understatement
D. P144,500 understatement
15. What is the total effect of the errors on the balance of Samoas retained earnings at December 31, 2017?
A. P156,000 understatement
B. P87,000 overstatement
C. P133,000 understatement
D. P85,000 understatement
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
Problem #6
LABADA CO.s portfolio of trading securities includes the following on December 31, 2016:
All of the above securities have been purchased in 2016. In 2017, Labada Co. completed the following securities
transactions:
Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other transaction
costs of P4,950.
The Labada Co. portfolio of trading securities appeared as follows on December 31, 2017:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,0002
P1,885,950 P1,965,000
1
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.
16. What amount of unrealized gain on these securities should be reported in the 2017 income statement?
17. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2017?
18. What amount should be reported as trading securities in Labadas statement of financial position on December
31, 2017?
Problem #7
Camry Inc. is selling audio and video appliances. The companys fiscal year ends on March 31. The following
information relates to the obligation of the company as of March 31, 2017:
Notes payable
Camry Inc. has signed several long-term notes with financial institutions. The maturities of these notes are given
below. The total unpaid interest for all of these notes amounts to P408,000 on March 31, 2017
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
Due Date
April 30, 2017 P720,000
July 31, 2017 P1,080,000
September 1, 2017 P540,000
February 1, 2018 P540,000
April 1, 2018 March 31, 2019 P3,240,000
Total P6,120,000
Estimated Warranties
Camry Inc. has a 1 year product warranty on some selected items. The estimated warranty liability on sales made
during the 2015-2016 fiscal year-end and still outstanding as of March 31, 2016, amounted to P302,400. The
warranty costs on sales made from April 1, 2016 to March 31, 2017 are estimated at P756,000. The actual warranty
costs incurred during 2016-2017 fiscal year are as follows:
Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to P672,000 as of March 31,
2017.
Dividends
On March 10, 2017, Civic Inc.s BOD declared cash dividends of P.30 per ordinary share and a 10% ordinary share
dividend. Both dividends were to be distributed on April 5, 2017 to shareholders on record at the close of business
on March 31, 2017. As of March 31, 2017, Civic Inc. has 6 million, P2 par value, ordinary shares issued and
outstanding.
Bonds Payable
Civic Inc. issued P6,000,000, 12% bonds, on October 1, 2011 at 96. The bonds will mature on October 1, 2021.
Interest is paid semi-annually on October 1 and April 1. Civic Inc. uses straight line method to amortize the bond
discount.
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
1. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Performing analytical procedures to identify areas that may represent specific risks
b. Reviewing investment transactions of the audit period
c. Reading the minutes of stockholders and director meeting to discover unusual transactions
d. Issuance of management letter
2. An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a
final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and
observed by the auditor at the time of the physical inventory count are
4. The auditor observed that the gross margin percentage was unchanged from the prior year although gross margin
increased from the prior year. Which of the following is most likely explanation for this situation?
a. The effective income tax rate decreased, as compared to the prior year/
b. A larger percentage of the sales occurred during the last month of the year, as compared to the prior year
c. Sales increased at the same percentage as cost of goods sold
d. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year
5. After the auditor has prepared a flowchart of internal control for sales and cash receipts transactions and evaluated the
design of the system, the auditor would perform tests of controls on all control procedures
a. Only persons who handle cash receipts should be responsible for the preparation of documents that reduce
accounts receivable balances
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account
once a year, preferable at year-end
d. The billing function should be assigned to persons other than those responsible for maintaining accounts
receivable subsidiary records
7. Which of the following would best protect a company that wishes to prevent lapping:
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
d. Having customers send payments directly to the companys bank
8. An internal control device for cash which requires that all cash receipts should be deposited intact, and all cash
payments should be made by means of cheque:
a. Impromptu system
b. Fluctuating fund system
c. Imprest system
d. Auditing system
9. To control purchasing and accounts payable, an information system must include certain source documents. For a
manufacturing organization, these documents should include:
10. Which of the following functions is not appropriate for the accounts payable department
11. Which of the following departments most likely would approve changes in pay rates and deductions from employee
salaries?
a. Personnel
b. Controller
c. Treasurer
d. Payroll
12. A means of ensuring that payroll cheques are drawn for properly authorized amounts is to
13. Internal control is improved when the quantity of merchandise ordered is omitted from the copy of the purchase order
sent to the
14. How can an auditor test to determine whether receiving department procedures are applied properly?
15. Which of the following controls would help prevent overpaying a vendor?
a. Requiring the cheque signer to mail the cheque directly to the vendor
b. Reviewing the accounting distribution for the expenditure
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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
Manila, Philippines
c. Approving the purchase before ordering from the vendor
d. Reviewing and canceling the supporting documents when a cheque is issued
16. In a properly designed internal accounting control system, the same employees should not be permitted to
17. The authority to accept incoming goods in receiving should be based on a (an)
a. Vendors invoice
b. Bill of lading
c. Materials requisition
d. Purchase order
18. In obtaining an understanding of a manufacturing entitys internal control over inventory balances, an auditor most
likely would
19. Which of the following controls most likely addresses the completeness assertion for inventory?
20. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a
policy requiring a periodic
The biggest risk is not taking any risk.. In a world that is changing really quickly,
the only strategy that is guaranteed to fail is not taking risks. MZ
- End -
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SOLUTION - AUDITING PROBLEMS TEST BANK 1
PROBLEM 1 TANYING CORP.
Distribution costs:
Sales salaries and commissions (P75,000 + [P9,180 x 3%]) P75,275
Advertising expense (P48,270 + [P5,454 x 2/6]) 50,088
Depreciation expense Sales/delivery equipment (P18,300 + [P23,400 x 10% x 10/12]) 20,250
Freight expense 10,500
Travel expense sales representatives 13,680
Miscellaneous selling expenses 8,220
Total P178,013
Administrative expenses:
Legal services P 6,675
Insurance and licenses 23,040
Depreciation expense office equipment 12,600
Utilities 19,200
Telephone and postage 4,425
Office supplies expense (P6,540 P3,675) 2,865
Officers salaries 109,800
Doubtful accounts expense (P783,000 x 2% = P15,660 P480) 15,180
Total P193,785
Accounts Accounts
Cash Receivable Inventory Payable
Per books P963,200 P2,254,000 P6,050,000 P4,201,000
AJE 1 (654,600) 310,000 --- ---
2 360,000 --- --- 372,400
3 a --- --- --- (175,000)
b --- --- 130,000 ---
c --- --- (637,500) ---
d --- --- 217,500 217,500
e --- --- 275,000 ---
Per audit P668,600 P2,564,000 P6,035,000 P4,615,900
AJES
1. Sales 360,100
Accounts receivable (P294,500 / 95%) 310,000
Sales discounts (P310,000 x 5%) 15,500
Cash 654,600
2. Cash (P372,400 P12,400) 360,000
Purchase discounts 12,400
Accounts payable 372,400
3. a Accounts payable 175,000
Purchases 175,000
b Inventory 130,000
Cost of sales 130,000
c Cost of sales 637,500
Inventory 637,500
d Purchases 217,500
Accounts payable 217,500
Inventory 217,500
Cost of sales 217,500
e Inventory 275,000
Cost of sales 275,000
f No adjusting entry
LABADA CO.
CONDESSA CO.
3. Land 900,000
Treasury shares (P40 x 21,000) 840,000
Share premium treasury 60,000
4. Cash (P105 x 15,000) 1,575,000
Preference share capital (P100 x 15,000) 1,500,000
Share premium preference 75,000
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