FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

AUD-01 ERROR CORRECTION

PROBLEM 1.
In connection with your audit of Foss Corp.’s year-end financial statements for the year ended 2018, the accountant
provided you the trial balance of the company as of December 31, 2018:

Foss Corp.
Trial Balance
December 31, 2018

Debit Credit
Cash 286,500
Accounts receivable 922,500
Allowance for doubtful accounts 31,500
Inventory, December 31, 2017 876,000
Prepaid expenses 12,000
Investments 165,000
Furniture and Equipment 468,000
Miscellaneous Equipment 135,000
Accumulated Depreciation 114,600
Accounts Payable 814,500
Accrued Expenses 76,500
Unearned Rent Income 19,200
Ordinary Share Capital 900,000
Retained Earnings 274,200
Sales 5,250,000
Rent Income 72,000
Purchases 3,636,000
Salaries Expenses 600,000
Advertising Expense 186,000
Commission Expense 120,000
Utilities Expense 48,000
Supplies Expense 18,000
Transportation Expense 21,000
Repairs and Maintenance 24,000
Miscellaneous Expense 34,500
7,552,500 7,552,500

You have also gathered the following information as part of your audit findings:
a. The Cash account included equipment acquisition fund amounting to P90,000.
b. A physical inventory taken on December 31, 2018 revealed goods costing P900,000.
c. Goods purchased under FOB shipping point and verified to have been shipped by the supplier on December 28,
2018 were received and recorded by Foss Corp. on January 4, 2019, P75,000.
d. The allowance for doubtful accounts should be adjusted to 5% of accounts receivable.
e. The company purchased 150 shares of its P100 par value ordinary share capital for P45,000, the amount having
been charged to the Investment account.
f. Except for equipment purchased on June 30, 2018 for P30,000 cash, all equipment were acquired at the inception
of the company three years ago. Depreciation for 2018 has not been recorded.
g. Prepaid expenses include P7,200 insurance premium on a one-year insurance policy taken on October 1, 2018.
h. Unearned rent income on December 31, 2018 amounted to P15,000.
i. Accrued expense on December 31, 2018 amounted to P81,000.

Requirements:
1. Prepare audit adjusting entries.
2. Prepare a working trial balance to facilitate the preparation of the financial statements for the year ended
December 31, 2018.

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PROBLEM 2.
Aztec Company prepared its financial reports for the recently concluded year-end. It employs periodic system in recording
its inventory. In the accountant’s last review of the accounting records, the accountant noticed the following errors:

• Prepayments for insurance worth 12,000 were paid and expensed at the beginning of 2018. The policy is good for 2
years, however, none of the unused portion was recognized by December 31, 2018.
• Annual rent amounting to 36,000 was paid starting June 1, 2018. It was recorded as an asset at the time of payment.
No adjustment was made for this account as of December 31, 2018.
• Accrual for salaries amounting to P10,000 was omitted at the end of 2018.
• Accrual for interest receivables amounting to P55,000 was omitted at the end of 2018.
• Footing and extension errors caused the inventory at December 31, 2018 to be understated by P11,880.
• Purchases of P17,100 in 2018 was recorded as purchases of 2019.

Requirements:
1. Assuming the errors were discovered at the end of 2018, determine the effect of the errors in profit or loss for
2018 and the correcting entries at the end of 2018 assuming (a) the books of 2018 are not yet closed and (b) the
books of 2018 are already closed.
2. Assuming the errors were discovered at the end of 2019, determine the effect of the errors in profit or loss for
2019 and retained earnings at the end of 2019 and the correcting entries at the end of 2019 assuming (a) the
books of 2019 are not yet closed and (b) the books of 2019 are already closed.

PROBLEM 3.
Cossack Company’s December 31, year-end financial statement contained the following reports:

December 31, 2017 December 31, 2018

Ending inventory P100,000 understated P90,000 overstated
Depreciation expense 20,000 understated

An insurance premium of P75,000 was prepaid in 2017 covering the years 2017, 2018 and 2019. The same was charged
to expense in full in 2017. In addition, on December 31, 2018, a fully depreciated machinery was sold for P160,000 cash,
but the sale was not recorded until 2019. There were no other errors during 2017, 2018 and 2019 and no corrections
have been made for any of the errors. Ignore income tax considerations.

Requirements:
1. What is the net effect of the errors on the 2017 profit?
2. What is the net effect of the errors on the 2018 profit?
3. What is the net effect of the errors on the company’s working capital at December 31, 2018?
4. What is the net effect of the errors on the balance of the company’s retained earnings at December 31, 2018?
5. What is the net effect of the errors on the company’s working capital at December 31, 2019?

PROBLEM 4.
The following information pertains to Berlin Company's depreciable assets:

1. Machine X was purchased for P150,000 on January 1, 2013. The entire, cost was expensed in the year of
acquisition. The estimated useful life of this machine is 15 years with no residual value.

2. Machine Y cost P525,000 and was acquired on January 1, 2014. On the acquisition date, the expected useful life
was 12 years with no residual value. The straight-line depreciation method was used. On January 2, 2018, it was
estimated. that the remaining life of the asset would be 4 years and that there would be a P25,000 residual value.

3. A building was purchased on January 3, 2015, for P3,000,000. The building was expected to have a useful life of
20 years with no residual value. The straight-line depreciation method was used. On January 1, 2018, a change
was made to the sum-of-the-years’ digits method of depreciation. No change was made to the estimated useful
life and residual value of the building.

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AUD-01. Error Correction

Requirements
1. What is the adjusting entry on January 1, 2018, relative to machine?
Machinery X 150,000
Accumulated depreciation 50,000
Retained earnings 100,000
2. What is the carrying value of machine Y on January 1, 2018?
3. What is the depreciation expense on machine Y for 2018?
4. What is the book value of the building at December 31, 2017?
5. What is the book value of the building on December 31, 2018?

PROBLEM 5.
The condensed income statement of Solis Ltd. for the year ended December 31, 2018, is presented below:

Solis Ltd.
INCOME STATEMENT
For the Year Ended December 31, 2018

Sales P1,000,000
Cost of goods sold 600,000
Gross income 400,000
Operating expenses 150,000
Profit P 250,000

The December 31, 2018, audit of the company’s financial statements disclosed the following errors:

1. December 31, 2018, inventory understated P31,000.

2. Accrued expenses of P4,000 and prepaid expenses of P6,000 were not recognized in the company’s books.
3. Sales of P5,000 were not recorded until January 2019, although the goods were shipped in December 2018, and
were excluded from the December 31 physical inventory.
4. Purchases of P30,000 made in December 2018, were not recorded although the goods were received and properly
included in the December 31 physical inventory.
5. A machine was sold for P10,000 on July 1, 2018, and the proceeds were credited to the Sales account. The
machine was acquired on January 1, 2015, for P60,000. At that time, it had an estimated life of 6 years with no
residual value. No depreciation was recorded on this machine in 2018.

Requirements:
1. Prepare the necessary adjusting journal entries on December 31, 2018.
2. What is the corrected net income for the year ended December 31, 2018?

PROBLEM 6
1. A financial statement audit aims to
a. Present financial information about an entity for use by external users.
b. Determine whether the entity appropriately pays its income tax due.
c. Determine whether the entity is able to pay its maturing obligations.
d. Determine whether financial statements presented by the management are prepared in accordance with an
applicable financial reporting framework.

2. Because of the risk of material misstatement, an audit of financial statements in accordance with generally
accepted auditing standards should be planned and performed with an attitude of
a. Objective judgment. c. Professional skepticism
b. Independent integrity d. Impartial conservatism

3. Which of the following statements best describes an auditor’s responsibility regarding misstatements?
a. An auditor should plan and perform an audit to provide reasonable assurance of detecting misstatements that
are material to the financial statements.
b. An auditor is responsible to detect material errors but has no responsibility to detect material fraud that is
concealed through employee collusion or management override of internal control.

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AUD-01. Error Correction
c. An auditor has no responsibility to detect material misstatements unless analytical procedures or tests of
transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements
were materially misstated.
d. An auditor has no responsibility to detect material misstatements because an auditor is not an insurer and an
audit does not constitute a guarantee.

4. What is the main purpose of an auditor in his/her evaluation of the client’s internal control system?
a. To properly distribute the different tasks to the members of the audit team.
b. To make a decision whether or not accept a new engagement or retain an existing client.
c. To determine the extent of audit procedures necessary to be performed.
d. To gather sufficient evidential matter as basis for audit opinion.

5. The current file of an audit documentation most likely would include

a. Bond indenture of 20-year bonds payable
b. Articles of incorporation
c. Pension plan contract
d. Analysis of accounts receivable

6. An audit documentation should

a. Not contain comments concerning management
b. Show that the accounting records agree or reconcile with the management
c. Be destroyed after an announcement has been made for litigation involving an audit engagement
d. Be made available to other even without the consent of the audit client

7. Which of the following statements is true?

a. It is usually easier for the auditor to uncover irregularities than errors.
b. It is usually easier for the auditor to uncover errors than irregularities.
c. It is equally difficult for the auditor to uncover errors or irregularities.
d. Usually, none of the above statements are true.

***End of Material***

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