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Cebu CPAR CENTERMandaue City, Cebu

AUDITING PROBLEMSPREWEEK LECTURE

PROBLEM NO. 1The following accounts were included in the unadjusted trial balance of Pit!n C!"#anyas of December 31, 2006:

Cash P !1,600"ccounts recei#able 1,12$,000%erchandise in#entor& 3,02',000

"ccounts (a&able 2,100,'00)ther current liabilities 21','00

During &our audit, &ou noted that Pistons held its cash boo*s o(en after &ear+end so that amore fa#orable balance sheet could be (re(ared for credit (ur(oses Cash recei(ts and

disbursements for the first 10 da&s of -anuar& were recorded as December transactionsThe following information is gi#en:

1 -anuar& cash recei(ts recorded in December cash boo* totaled P32$,300, of whichP1!0,0'0 re(resents cash sales and P1$,2'0 re(resents collections on account forwhich cash discounts of P$,$'0 were gi#en

2 -anuar& cash disbursements recorded in the December chec* register li.uidatedaccounts (a&able of P1!6,200 on which discounts of P6,200 were ta*en

3 The amount shown as in#entor& was determined b& (h&sical count on December 31,

2006QUESTIONS:

/ased on the abo#e and the result of &our audit, answer the following:

1 The adjusted cash balance as of December 31, 2006 isa P!1,600 b P33,300 c P30,'00 d P36,$00

2 The adjusted wor*ing ca(ital as of December 31, 2006 isa P2,31$,600 b P2,13,100 c P2,13,$'0 d P2,36!,00

3 The adjusted current ratio as of December 31, 2006 isa 200 b 1!' c 1!6 d 211

During &our eamination of a cut+off ban* statement, &ou noticed that the majorit& ofchec*s listed as outstanding at December 31 had not cleared the ban* This wouldindicatea " high (ossibilit& of *itingb " high (ossibilit& of la((ingc That the cash disbursement journal had been held o(en (ast December 31d That the cash disbursement journal had been closed (rior to December 31

' %a*ing the financial statements indicate a more fa#orable (osition b& gi#ing effect totransactions in a (eriod other than that in which these actuall& occurred is calleda Pro+forma balance sheet c a((ing

b inancial (rojections d 4indow dressing

PROBLEM NO. $

)n -anuar& 10, 200$, &ou started the audit of the financial records of the %eat C!"#anyfor the &ear ended December 31, 2006 rom &our in#estigation, &ou disco#ered thefollowing:

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1 The boo**ee(er also acts as the cashier )n December 31, 2006, the boo**ee(er5s&ear+end cash reconciliation contains the following items

Cash (er ledger, 12+31+06 P1,200Cash (er ban*, 12+31+06 '1!,!00)utstanding chec*s 1,$60%iami Co chec* charge b& ban* in error

12+20+06 corrected b& ban* on 1+'+0$ 1,200Cash in transit, credited b& ban* on 1+2+0$ ',$60

2 The cash account balances (er ledger as of 12+31+06 were: Cash + P1,200 (ett&cash + P1,200

3 The count of the cash on hand at the close of business on -anuar& 10, 200$,including the (ett& cash, was as follows:

Currenc& and coin P3,0!07(ense #ouchers 1607m(lo&ees5 8)95s dated 1+'+0$ 0

Customers5 chec*s in (a&ment of account 2,320P6,000

rom -anuar& 2, 200$ to -anuar& 10, 200$, the date of &our cash count, total cashrecei(ts a((earing in the cash records were P6!,!00 "ccording to the ban*statement for the (eriod from -anuar& 2, 200$ to -anuar& 10, 200$, total credits wereP60,!00

' )n -ul& ', 2006, cash of P3,200 was recei#ed from an account customer the"llowance for Doubtful "ccounts was charged and "ccounts ecei#able credited

6 )n December ', 2006, cash of P2,00 was recei#ed from an account customer

8n#entor& was charged and "ccounts ecei#able credited

$ Cash of P',!0 recei#ed during 2006 was not recorded

! Chec*s recei#ed from customers from -anuar& 2, 200$ to -anuar& 10, 200$, totalingP3,360, were not recorded but were de(osited in ban*

)n -ul& 1, 2006, the ban* refunded interest of P160 because a note of the ;eatsCom(an& was (aid before maturit&

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' "n auditor would consider a cashier5s job descri(tion to contain com(atible duties ifthe cashier recei#es remittance from the mailroom and also (re(ares thea Dail& de(osit sli( c emittance ad#icesb Prelist of indi#idual chec*s d %onthl& ban* reconciliation

PROBLEM NO. +

Net C!"#any(roduces (aints and related (roducts for sale to the construction industr&throughout %etro %anila 4hile sales ha#e remained relati#el& stable des(ite a decline inthe amount of new construction, there has been a noticeable change in the timeliness withwhich the com(an&5s customers are (a&ing their bills

The com(an& sells its (roducts on (a&ment terms of 2=10, n=30 8n the (ast, o#er $'(ercent of the credit customers ha#e ta*en ad#antage of the discount b& (a&ing within 10da&s of the in#oice date During the &ear ended December 31, 200', the number ofcustomers ta*ing the full 30 da&s to (a& has increased Current indications are that less

than 60> of the customers are now ta*ing the discount 9ncollectible accounts as a(ercentage of total credit sales ha#e risen from the 1'> (ro#ided in the (ast &ears to >in the current &ear

8n res(onse to &our re.uest for more information on the deterioration of accountsrecei#able collections, the com(an&5s controller has (re(ared the following re(ort:

Net C!"#anyA!unt Reei-abe C!eti!n

December 31, 2006

The fact that some credit accounts will (ro#e uncollectible is normal, and annual bad

debt write+offs had been 1'> of total credit sales for man& &ears ;owe#er, duringthe &ear 2006, this (ercentage increased to > The accounts recei#able balance isP1,'00,000, and the condition of this balance in terms of age and (robabilit& ofcollection is shown below:

Pro(ortion to total "ge of accounts Probabilit& of collection6> 1 ? 10 da&s 0>1!> 11 ? 30 da&s $'>!> Past due 31 ? 60 da&s '0>'> Past due 61 ? 120 da&s !00>3> Past due 121 ? 1!0 da&s 6'0>2> Past due o#er 1!0 da&s 200>

"t the beginning of the &ear, the "llowance for Doubtful "ccounts had a creditbalance of P2$,300 The com(an& has (ro#ided for a monthl& bad debt e(enseaccrual during the &ear based on the assum(tion that > of total credit sales will beuncollectible Total credit sales for the &ear 2006 amounted to P!,000,000, andwrite+offs of uncollectible accounts during the &ear totaled P22,'00

QUESTIONS:

/ased on the foregoing, answer the following:

1 ;ow much is the adjusted balance of the allowance for doubtful accounts as ofDecember 31, 2006@a P10,00 b P,!00 c P$$,100 d P2$,300

2 The necessar& adjusting journal entr& to adjust the allowance for doubtful accountsas of December 31, 2006 would include a credit to allowance for doubtful accounts of:a P2$,300 b P,!00 c P$$,100 d P22,300

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3 "n aging anal&sis of accounts recei#able would (ro#ide an indication as to thea Aalidit& of the accounts c 8ntegrit& of the credit grantorsb Collectibilit& of the accounts d Bol#enc& of customers

rom the stand(oint of good internal control, the billing de(artment, for good internalcontrol should be under directions of thea Credit manager c Controller

b Bales manager d Treasurer

' 8n order that sound internal accounting control could be achie#ed, which de(artmentshould (erform the acti#ities of matching shi((ing documents with sales orders and(re(aring dail& sales summaries@a /illing b Credit c Bhi((ing d Bales order

PROBLEM NO. /

8n connection with &our eamination of the financial statements of Ca-aie0, In for the&ear ended December 31, 2006, &ou were able to obtain certain information during &our

audit of the accounts recei#able and related accounts

The December 31, 2006 balance in the "ccounts ecei#able control accounts is

P''!,600

"n aging schedule of the accounts recei#able as of December 31, 2006 is (resented

below:

"ge

uncollectible

Two entries were made in the Doubtful "ccounts 7(ense account were:

1 " debit on December 31 for the amount of the credit to the "llowance for Doubtful"ccounts

2 " credit for P,110 on

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2 ;ow much is the adjusted balance of the "llowance for Doubtful "ccounts as ofDecember 31, 2006@a P1,$06 b P1,'!3 c P1,!30 d P1,1$

3 ;ow much is the Doubtful "ccounts e(ense for the &ear 2006@

a P16,1 b P16,!6! c P1$,11' d P2$,30 ;ow much is the net adjustment to the Doubtful "ccounts e(ense account@

a P6,'2 credit b P6,$0' credit c P6,!2 credit d P,110 debit

' "uthoriFation for the write+off of accounts recei#able should be the res(onsibilit& ofthea Credit %anager c "ccounts recei#able cler*b Controller d Treasurer

PROBLEM NO. '

Wia0d Ente0#0ie loaned P1,000,000 to 4ashington 8nc on -anuar& 1, 200 Theterms of the loan re.uire (rinci(al (a&ments of P200,000 each &ear for ' &ears (lusinterest at !> The first (rinci(al and interest (a&ment is due on -anuar& 1, 200'4ashington made the re.uired (a&ments during 200' and 2006 ;owe#er, during 20064ashington began to e(erience financial difficulties, re.uiring 4iFards to reassess thecollectibilit& of the loan )n December 31, 2006, 4iFards determines that the remaining(rinci(al (a&ments will be collected, but the collection of interest is unli*el& The (re#ailinginterest rate for similar t&(e of note as of December 31, 2006 is 10>

QUESTIONS:

/ased on the abo#e and the result of &our audit, answer the following:

1 The (resent #alue of the e(ected future cash flows as of December 31, 2006 isa P'$,100 b P'1',00 c P''6,60 d P600,000

2 The loan im(airment for the &ear 2006 isa P!,600 b P3,360 c P'2,00 d P0

3 ;ow much is the interest income for the &ear 200$, assuming that 4iFardsGassessment of the collectibilit& of the loan has not changeda P2$,$6! b P2!,'31 c P2',232 d P32,000

4hich of the following audit (rocedures (ro#ides the best e#idence about thecollectibilit& of notes recei#able@a Confirmation of note recei#able balances with the debtorsb 7amination of notes for a((ro(riate debtorsG signaturesc 7amination of cash recei(ts records to determine (rom(tness of interest and

(rinci(al (a&mentsd econciliation of the detail of notes recei#able and the (ro#ision for uncollectible

amounts to the general ledger control

' 4hen auditing the allowance for uncollectible accounts, the least reliance should be(laced on which of the following@a The credit managerGs o(inion

b "n aging of (ast due accountsc Collection e(erience of the clientGs collection agenc&d atios that show the (ast relationshi( of the allowance to net credit sales

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PROBLEM NO. *

Pae0 C!"#any, a manufacturer of small tools, (ro#ided the following information fromits accounting records for the &ear ended December 31, 2006:

8n#entor& at December 31, 2006 based on (h&sical count on

December 31, 2006E P1,'20,000"ccounts (a&able at December 31, 2006 1,200,000

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4hen auditing merchandise in#entor& at &ear end, the auditor (erforms a (urchasecutoff test to obtain e#idence thata "ll goods (urchased before &ear end are recei#ed before the (h&sical in#entor&

countb

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PROBLEM NO. 5

/oth /B" 8nc and CP" Cor( ha#e 1,000,000 shares of no+(ar common stoc*outstanding Bu6 In.ac.uired 100,000 shares of /B" stoc* for P' (er share and2'0,000 shares of CP" stoc* for P10 (er share on -anuar& 2, 200' /oth securities are

being held as long term in#estments Changes in retained earnings for /B" and CP" for200' and 2006 are as follows:

/B", 8nc CP" Cor(etained earnings deficitE, 1=1=0' P2,000,000 P3'0,000ECash di#idends, 200' 2'0,000E +

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" second tract of land site number 103E with a building was ac.uired for P1,200,000

The closing statement indicated that the land #alue was P!00,000 and the building#alue was P00,000 Bhortl& after ac.uisition, the building was demolished at a costof P120,000 " new building was constructed for P600,000 (lus the following costs:

7ca#ation fees P ,000

"rchitectural design fees 32,000/uilding (ermit fee ,0008m(uted interest on funds used during construction 2,000

The building was com(leted and occu(ied on Be(tember 1, 2006

" third tract of land site number 10E was ac.uired for P2,00,000 and was (ut on

the mar*et for resale

7tensi#e wor* was done to a building occu(ied b& B(urs under a lease agreement

The total cost of the wor* was P'00,000, which consisted of the following:

Particulars "mount 9seful lifePainting of ceilings P 0,000 )ne &ear 7lectrical wor* 10,000 Ten &earsConstruction of etension to

current wor*ing area 320,000 Thirt& &ears

The lessor (aid one+half of the costs incurred in connection with the etension to thecurrent wor*ing area

During December 2006, costs of P260,000 were incurred to im(ro#e leased office

s(ace The related lease will terminate on December 31, 200!, and is not e(ectedto be renewed

" grou( of new machines was (urchased under a ro&alt& agreement which (ro#ides

for (a&ment of ro&alties based on units of (roduction for the machines The in#oice(rice of the machines was P300,000, freight costs were P!,000, unloading chargeswere P6,000, and ro&alt& (a&ments for 2006 were P'2,000

QUESTIONS:

/ased on the abo#e and the result of &our audit, com(ute for the following as of December31, 2006:

1 anda P!,00,000 b P',00,000 c P',!0,000 d P6,000,000

2 /uildingsa P,2!0,000 b P3,!!0,000 c P3,!00,000 d P,200,000

3 easehold im(ro#ementsa P2,$20,000 b P2,600,000 c P2,'60,000 d P2,300,000

%achiner& and e.ui(menta P3,100,000 b P3,10!,000 c P3,11,000 d P3,166,000

' 8n testing (lant and e.ui(ment balances, an auditor eamines new additions listed on

an anal&sis of (lant and e.ui(ment This (rocedure most li*el& obtains e#idenceconcerning management5s assertion ofa Com(leteness c Presentation and disclosureb 7istence or occurrence d Aaluation or allocation

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PROBLEM NO. 1)

The following inde(endent situations describe facts concerning the ownershi( of #ariousassets 8n each case, com(ute the amount of de(reciation or de(letion for 2006

1 Buns Com(an& (urchased a tooling machine in 16 for P600,000 The machinewas being de(reciated on the straight+line method o#er an estimated useful life of 20&ears with no sal#age #alue "t the beginning of 2006, when the machine had beenin use for 10 &ears, Buns (aid P120,000 to o#erhaul the machine "s a result of thisim(ro#ement, Buns estimated that the useful life of the machine would be etendedan additional ' &earsa P2!,000 b P1',000 c P20,000 d P23,000

2 Phoeni %anufacturing Co, a calendar+&ear com(an&, (urchased a machine forP6'0,000 on -anuar& 1, 200 "t the date of (urchase, Phoeni incurred the fol+lowing additional costs:

oss on sale of old machiner& P1',000reight cost ',0008nstallation cost 20,000Testing costs (rior to regular o(eration ,000

The estimated sal#age #alue of the machine was P'0,000, and Phoeni estimatedthat the machine would ha#e a useful life of 20 &ears, with de(reciation beingcom(uted using the straight+line method 8n -anuar& 2006, accessories costingP!,600 were added to the machine to reduce its o(erating costs Theseaccessories neither (rolonged the machineGs life nor did the& (ro#ide an& additional

sal#age #aluea P31,'0 b P3,1'0 c P33,!!0 d P36,30

3 )n -ul& 1, 2006,

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a#ailable for mining 8n 2006, 1'0,000 tons were mined "ll the ore mined was solda P3$2,000 b P26,000 c P33,'00 d P06,'00

PROBLEM NO. 11

)n -anuar& 1, 200', Nu44et C!"#any entered into a lease contract with Den#erCom(an& for a new e.ui(ment that had a selling (rice of P2,120,000 The lease contract

(ro#ides that annual (a&ments of P20,000 will be made for 6 &ears The economic life of thee.ui(ment is &ears 600,000%ortgage notes (a&able ? 12> 1,'00,000/onds (a&able 2,000,000

The following additional information (ertains to these liabilities

a "ll trade notes (a&able are due within si months of the balance sheet date

b /an* notes+(a&able include two se(arate notes (a&able to "llied /an*1E " P300,000, !> note issued %arch 1, 200, (a&able on demand 8nterest is

(a&able e#er& si months2E " 1+&ear, P'00,000, 11 J> note issued -anuar& 2, 2006 )n December 30,

2006, %a#eric*s negotiated a written agreement with "llied /an* to re(lace thenote with a 2+&ear, P'00,000, 10> note to be issued -anuar& 2, 200$ Theinterest was (aid on December 31, 2006

c The 10> mortgage note was issued )ctober 1, 2003, with a term of 10 &ears Termsof the note gi#e the holder the right to demand immediate (a&ment if the com(an& failsto ma*e a monthl& interest (a&ment within 10 da&s of the date the (a&ment is due "sof December 31, 2006, %a#eric*s is three months behind in (a&ing its re.uired interest

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(a&ment

d The 12> mortgage note was issued %a& 1, 2000, with a term of 20 &ears The current(rinci(al amount due is P1,'00,000 Princi(al and interest (a&able annuall& on "(ril30 " (a&ment of P220,000 is due "(ril 30, 200$ The (a&ment includes interest ofP1!0,000

e The bonds (a&able is 10+&ear, !> bonds, issued -une 30, 1$ 8nterest is (a&ablesemi+annuall& e#er& -une 30 and December 31

QUESTIONS:

/ased on the abo#e and the result of &our audit, answer the following:

1 8nterest (a&able as of December 31, 2006 isa P1'',000 b P13,000 c P203,000 d P21',000

2 The (ortion of the

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"ccrued income + 1,000 + 1,200

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PROBLEM NO. $

/an* /oo*s

9nadjusted balances, 12=31=06

"dd deductE adjustments:

)utstanding chec*s

7rroneous ban* debit

Cash in transit

Collection charged to "llow or Doubtful a=cs

Collection charged to 8n#entor&

9nrecorded cash recei(t

9nrecorded interest refund

Chec* returned and re(laced not &et cancelled

/alances

Bhortage

"djusted balances

PROBLEM NO. +

Categor& "ging ratio " /alance ate "llowance

1 ? 10 da&s 6> 100>

11 ? 30 da&s 1!> 2'0>

31 ? 60 da&s !> '00>

61 ? 120 da&s '> 2000>

121 ? 1!0 da&s 3> 3'00>

o#er 1!0 da&s 2> !000>

100> 1,'00,000

PROBLEM NO. /

H=B 60 61 to 0 1 to 120 o#er 120

9nadjusted balances ''!,600

"dd deductE adjustments:

"-7

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9nadjusted balances 1,'20,000 1,200,000 !,1'0,000

"dd deductE adjustments:

a

b

c

de

f

g

h

"djusted balances

PROBLEM NO. 2

Cost of units a#ailable for sale

ess (urchases:-ul& ' 60,000 units P00E

-ul& 11 '0,000 units P01E

-ul& 1' 0,000 units P02E

-ul& 16 '0,000 units P0'E

Cost of beginning in#entor&

Di#ide b& cost (er unit

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Cost subject to de(letion

Di#ide b& total estimated reser#es in 200'

De(letion rate in 200'

!=12E

Total interest (a&able, 12=31=06

PROBLEM NO. 1+

Preferredstoc*

Commonstoc* "P8C

etainedearnings

Treasur&stoc*

8ssuance of CB, 1=2=0'

8ssuance of PB, 1=2=0'

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8ssuance of CB, 3=2=0'

8ssuance of PB and CB for land, $=10=0'

Declared cash di#idend+PB and CB, 12=16=06