Ateneo De Zamboanga University

School of Management and Accountancy

S.Y. 2018-2019

AUDITING PROBLEM

I-AUDIT OF CASH

THEORIES
1. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft of P100,000. The other
account, Bank B, has a positive balance of P50,000. To conceal the overdraft from the auditor, the client may
decide to
a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but not the disbursement
and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year.

b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the receipt but not the disbursement
and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year.

c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the disbursement but not the receipt. List
the disbursement as an outstanding check, but do not list the receipt as a deposit in transit. Record the receipt at the
beginning of the following period.

d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the disbursement but not the receipt
and list the disbursement as an outstanding check. Record the receipt at the beginning of the following year.

2. An entity’s internal control structure requires every check request that there be an approved voucher, supported by
a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued
for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

a. Cancelled checks. c. Purchase orders.

b. Approved vouchers. d. Receiving reports.

PROBLEMS

A. You noted the following composition of ALOHA Company’s “cash account” as of December 31, 2017 in
connection with your audit:

Demand deposit account P2,000,000

Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2018) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2018 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000

Additional information follows:

a) Check of P200,000 in payment of accounts payable was recorded on December 31, 2017 but mailed to suppliers
on January 5, 2018.
b) Check of P100,000 dated January 15, 2018 in payment of accounts payable was recorded and mailed on
December 31, 2017.
c) The company uses the calendar year. The cash receipts journal was held open until January 15, 2007, during
which time P400,000 was collected and recorded on December 31, 2006.

Question:

The cash and cash equivalents to be shown on the December 31, 2017 balance sheet is:
a. P3,310, 000 c. P2,910,000
b. P1,910,000 d. P4,410,000

B. The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2017. The bank
statement as of December 31 showed a balance of P547,800. Additional information that might be useful in
reconciling the two balances follows:

(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored on December 29
(maturity date). The bank charged Manila's account for P142,650, including a protest fee of P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit of P27,000.
(d) Outstanding checks totaled P98,850 as of December 31.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been collected on December
27, and the bank charged a P360 collection fee.

Questions:

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

1. Adjusted cash in bank balance

a. P583,200 c. P589,200
b. P577,200 d. P512,400

2. Net adjustment to cash as of December 31, 2017

a. P104,370 c. P 98,370
b. P110,370 d. P175,170

II- AUDIT OF RECEIVABLES

THEORY

1. The negative form of accounts receivable confirmation request is particularly useful except when

a. Individual account balances are relatively large.

b. Internal control surrounding accounts receivable is considered to be effective.
c. A large number of small balances are involved.
d. The auditor has reason to believe the persons receiving the request are likely to give them consideration.

PROBLEM

Presented below are a series of unrelated situations. Answer the following questions relating to each of the
independent situations as requested.

1. Nadiya Company’s unadjusted trial balance at December 31, 2018, included the following accounts:

Debit Credit
Accounts receivable P1,000,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales returns and allowances 700,000

Nadiya Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad debt expense for
2018.
a. P225,000 c. P214,500
b. P254,500 d. P 55,000

2. An analysis and aging of Yousef Corp. accounts receivable at December 31, 2018, disclosed the
following:

Amounts estimated to be uncollectible P 1,800,000

Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000

What is the net realizable value of Yousef’ receivables at December 31, 2018?
a. P15,700,000 c. P16,250,000
b. P17,500,000 d. P14,450,000

3. Xena Company provides for doubtful accounts based 3% of credit sales. The following data are available for
2018.

Credit sales during 2018 P21,000,000

Allowance for doubtful accounts 1/1/18 170,000
Collection of accounts written off in prior years
(Customer credit was reestablished) 80,000
Customer accounts written off as
uncollectible during 2018 300,000

What is the balance in allowance for doubtful accounts at December 31, 2018?
a. P630,000 c. P500,000
b. P420,000 d. P580,000

4. At the end of its first year of operations, December 31, 2018, Danica, Inc. reported the following information:
Accounts receivable, net of allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2018 240,000
Bad debts expense for 2018 840,000

What should be the balance in accounts receivable at December 31, 2018, before subtracting the allowance for
doubtful accounts?
a. P10,100,000 c. P 9,740,000
b. P10,340,000 d. P10,580,000

5. The following accounts were taken from Hilary Inc.’s balance sheet at December 31, 2018.

Debit Credit
Accounts receivable P4,100,000
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2018.
a. P123,000 c. P223,000
b. P 23,000 d. P225,000

III- AUDIT OF INVENTORY

THEORIES

1. Demmi Manufacturing Corporation mass produces eight different products. The controller, who is interested in
strengthening internal controls over the accounting for materials used in production, would be most likely to
implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.

2. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s assertion about
a. Valuation or allocation.
b. Presentation and disclosure.
c. Rights and obligations.
d. Completeness

PROBLEM

During your audit of the records of the Manaoag Corporation for the year ended December 31, 2018, the following
facts were disclosed:

Raw materials inventory, 1/1/2018 P 720,200

Raw materials purchases 5,232,800
Direct labor 4,900,000
Manufacturing overhead applied (150% of direct labor) 7,350,000
Finished goods inventory, 1/1/2018 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a) Purchases of raw materials

Month Units Unit Price Amount

January – February 55,000 P17.76 P 976,800
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800

b) Data with respect to quantities are as follows:

Units
Explanation 1/1/18 12/31/18
Raw materials 35,000 ?
Work in process (80% completed) - 25,000
Finished goods 15,000 40,000
Sales, 200,000 units
c) Raw materials are issued at the beginning of the manufacturing process. During the year, no returns, spoilage, or
wastage occurred. Each unit of finished goods contains one unit of raw materials.

d) Inventories are stated at cost as follows:

Raw materials – according to the FIFO method
Direct labor – at an average rate determined by correlating total direct labor cost with effective production during
the period
Manufacturing overhead – at an applied rate of 150% of direct labor cost

QUESTIONS:

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

1. The raw materials inventory as of December 31, 2018 is

a. P992,000 c. P 936,000
b. P888,000 d. P1,040,000

2. The work in process inventory as of December 31, 2018 is

a. P1,496,000 c. P1,746,000
b. P1,514,000 d. P1,776,000

3. The finished goods inventory as of December 31, 2018 is

a. P2,793,600 c. P3,553,130
b. P3,334,000 d. P2,812,000

4. The cost of goods sold for the year ended December 31, 2018 is
a. P16,897,000 c. P14,077,000
b. P14,161,400 d. P13,911,400