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CEBU CPAR CENTER

Mandaue CIty

AUDITING PROBLEMS
COMPREHENSIVE PROBLEM
You were assigned to audit the financial statements of LARES Company for the year
ended December 31, 2005. The fieldwork has been completed and you are now going
over your audit findings to summarize your potential adjustments. The client is willing to
accept all the necessary adjustments in order for the financial statements to be presented
fairly in conformity with generally accepted accounting principles.
The following data were taken from your current working papers.
Cash account consists of the following items:
Petty cash fund
PBCom checking account
PNB current account
Total per GL

P 10,000
(15,000)
137,700
P 132,700

a. The count of the cashiers accountability on January 2, 2006, revealed total

currency and coins of P3,600. Unreplenished vouchers for various expenses
totaled P6,400, of which P1,200 pertains to January 2006.
b. On December 29, 2005, a check for P35,000 was drawn against PBCom current
account resulting in bank overdraft of P15,000. The check was picked up by the
supplier on January 3, 2006.
c. Bank reconciliation statement prepared by the cashier for the PNB account follows:
Bank balance
Add: Deposit in transit
Bank service charges
Total
Less: Outstanding checks
Check No.
567
589
617
626
Book balance
@

P 124,200
P 24,500
500
Amount
P 1,000
8,300
2,400
3,400

25,000
149,200
@

11,500
P 137,700

Check certified by the bank in December 2005.

All reconciling items were traced to the bank statement. Further investigation indicated
that the deposits in transit include a customers post-dated check amounting to P16,000.
The check represents a collection from account customer for sales made in the middle of
October 2005.
Your review of the clients internal control points out many weaknesses. Accordingly, you
did not perform tests of controls and you relied heavily on substantive procedures.

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Confirmation replies received directly from customers disclosed the following exceptions:
Confirmation
No.
Customers Comments
Audit Findings
5
The goods sold on December 1 The client failed to record credit
(Mang Bert) were returned on December 16, memo no. 23 for P12,000. The
2005.
merchandise was included in
the ending inventory at cost.
15
We do not owe this amount *
(Mang Jess) %#@ (bad word). We did not
receive any merchandise from
your company.

Investigation
revealed
that
goods sold for P16,000 were
shipped to Mang Jess on
December 29, 2005, terms FOB
shipping point. The goods were
lost in transit and the shipping
company has acknowledged its
responsibility for the lost of the
merchandise.

21
(Hercules)

I am entitled to a 10% employee Hercules is an employee of

discount. Your bill should be LARES.
Starting November
reduced by P1,200.
2005, all company employees
were entitled to a special
discount.

23
(Eric)

We have not yet sold the goods. Merchandise billed for P18,000
We will remit the proceeds as were consigned to Eric on
soon as the goods are sold.
December 30, 2005. The goods
cost P13,000.

34
(Mancio)

We do not owe you P20,000. The sale of merchandise on

We already paid our accounts December 18, 2005 was paid by
as evidenced by OR # 1234.
Mancio on January 6, 2006.

67
(Jimmy)

Reduce your bill by P1,500

This amount represents freight

paid by the customer for the
merchandise
shipped
on
December 17, 2005, terms, FOB
destination-collect.

From the schedule of accounts receivable as of December 31, 2005, you determined that
this account includes the following:
Accounts with debit balances:
60 days old and below
61 to 90 days
Over 90 days
Advances to officers
Accounts with credit balance
Accounts receivable per GL

P 238,500
117,200
85,400

P 441,100
16,400
(15,000)
P 442,500

The credit balance in customers account represents collection from a customer whose
account had been written-off as uncollectible in 2004.
Accounts receivable for more than a year totaling P21,000 should be written off.

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Based on your discussion with Eddie, LARES Credit Manager, you both agreed that an
allowance for doubtful accounts should be maintained using the following rates:
60 days old and below
61 to 90 days
Over 90 days

1%
2%
5%

The client determines its ending inventory by conducting a physical count at December 31
of each year. Compilation of physical inventory disclosed that tag numbers 143, 144, and
145 were not included in the inventory list.
Further investigation revealed the following:
Tag No.
143
200 units costing P8 per unit
144
800 units costing P15 per unit. Goods are held on consignment from
Lareng Co.
145
Cancelled tag
Your review of purchase transactions made a few days before and after December 31,
2005 revealed the following:
a. Merchandise costing P8,000 was received on January 3, 2006. The related invoice
was received and recorded on January 5, 2006. The invoice showed that the
shipment was made by the vendor on December 27, 2005; FOB destination.
b. Merchandise with a cost of P14,000 was received on December 31, 2005 and the
invoice was not recorded. The invoice was discovered at the Purchasing Officers
desk and was stamped On Consignment from Kolokoy Company.
c. Merchandise received on January 3, 2006 costing P17,000 was entered in the
voucher register on the same day. Shipment was made by the vendor FOB
shipping point on December 31, 2005.
An analysis of 2005 transactions affecting the Available-for-Sale Securities and related
accounts follows:
Jan. 01
Jan. 02
July 01
Sept. 08
Dec. 31

Available-for-sale Securities
Balance
Purchased 10,000 Super Co. common shares
Purchased P100,000,12% face value Mighty Co.
bonds
Purchased 500 LARES Co.s shares
Balance

P 240,000
250,000
100,000
6,000
P 596,000

a. The January 1 balance represents the cost of 10,000 shares of Super Co.s
common stock acquired on January 2, 2004.
b. On January 2, 2005, LARES purchased 10,000 additional shares of Super Co.s
common stock for P250,000 when the book value of Supers stockholders equity
was P2,500,000.
c. From Super Companys financial statements, you were able to obtain the following
information:
Net income
Dividends

2004
100,000
-

2005
250,000
170,000

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There are no other stockholders equity transactions that transpired in 2004 or 2005
for Super Company other than the above information.
At the end of 2005, the Super Co.s common share was selling at P26 per share
while LARES Co.s stock was selling at P15 per share.
d. Other income includes dividend of P34,000 received from Super Co. in 2005.
e. The client does not intend to hold Mighty bonds to maturity. The bonds pay interest
semi-annually on July 1 and January 1. Maturity date is 4 years from the date of
purchase. The Mighty bonds were selling at par at December 31, 2005.
Examination of the equipment and related accumulated depreciation account revealed the
following:
EQUIPMENT
01/01/2005
04/01/2005
07/01/2005
09/30/2005
12/31/2005

Balance
Proceeds from sale of equipment
Cash paid to acquire new equipment
Repair of equipment
Balance

P 640,000
(10,000)
70,000
5,000
P 705,000

01/01/2005
12/31/2005
12/31/2005

Accumulated Depreciation
Balance
Depreciation 2005
Balance

P 340,000
141,000
P 481,000

a. On April 1, an equipment costing P50,000, with a carrying value of P20,000 on the

date of sale was sold for P10,000.
b. Old equipment was traded-in for new equipment with a market value of P75,000.
The old equipment was bought for P60,000. The carrying value of this equipment
on January 1, 2005 was P5,000.
c. Annual depreciation is computed at 20%.
immaterial.

Salvage values of equipment are

Examination of subsequent disbursements revealed that expenses for telephone,

electricity, and water in 2005 totaling P32,000 were not recorded in the books.
On November 2, 2005, LARES Company issued P400,000 face value bonds. The bonds,
which will mature on January 1, 2010, pay interest of 12% every January 1. The bonds
were issued to give the bondholders a 14% yield.
From the minutes of the board of directors meetings, you gathered the following
information:
a. During the year 2005, the company issued 10,000 shares of its P10 par value
common stock for P12 each. The entire amount was credited to the common stock
account.
b. On December 31, 2005, the board of directors declared a 10% stock dividend to
stockholders on record as of January 16, 2006 distributable on January 31, 2006.
Presented on the next page are the unadjusted balances taken from the working trial
balance.

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LARES Company
December 31, 2005
Debit
Cash
Accounts receivable
Allowance for doubtful accounts
Interest receivable
Advances to officers and employees
Inventory
Available-for-sale securities
Investment in Associate
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Bank overdraft
Customers credit balance
Interest payable
Bonds payable
Discount on bonds payable
Common stock, P10 par
Stock dividends distributable
Additional paid-in capital
Retained earnings
Treasury stocks
Net sales
Cost of sales
Other income
Investment income
Operating expenses
Other expenses
Finance cost

Credit

P132,700
442,500
P15,000
367,200
596,000
705,000
481,000
168,175
28,600
416,000
670,000
80,000
90,975
1,053,500
525,400
42,450
276,900
-

P3,045,700

P3,045,700

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INSTRUCTIONS: Select the best answer from choices: A, B, C, and D that corresponds to
the audited balance of the account or account classification. Disregard tax implications.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

Cash
Accounts receivable
Allowance for doubtful accounts
Interest receivable
Advances to officers and employees

Inventory
Available-for-sale securities
Investment in associate
Equipment
Accumulated depreciation
Total assets
Accounts payable
Accrued expenses
Bank overdraft
Customers' credit balance
Interest payable
Bonds payable
Discount on bonds payable
Total liabilities
Common stock, P10 par
Stock dividends distributable
Additional paid-in capital
Retained earnings, 1/1/2005
Retained earnings, 12/31/2005
Treasury stock
Total stockholders equity
Net sales
Cost of sales
Other income
Investment income
Operating expenses
Other expenses
Finance cost
Net income
Cash shortage
Petty cash fund
Depreciation expense
Bond discount amortization
Implied goodwill

A
B
C
D
146,000
144,400
147,400
143,400
424,400
387,400 418,400
403,400
12,952
8,958
9,000
7,942
12,000
5,975
11,975
6,000
20,000
16,400
2,600
19,000
367,800
353,200
371,800
384,800
106,000
590,000
100,000
490,000
506,000
516,000
700,000
600,000
705,000
605,000
451,000
401,000
431,000
371,000
1,785,658 1,779,658 1,793,658 1,798,658
168,175
212,175
185,175
220,175
32,000
28,600
26,800
60,600
35,000
15,000
20,000
15,000
16,400
10,000
48,960
48,800
48,773
48,000
376,000
416,000
376,960
400,000
24,000
23,040
23,227
670,548
697,548
657,548
705,548
670,000
645,000
550,000
650,000
65,000
97,500
96,750
64,500
100,000
80,000
122,250
132,250
111,975
112,975
90,975
100,975
242,360
239,360
233,360
252,360
4,500
5,000
6,000
1,088,110 1,080,110 1,074,110 1,093,110
1,023,500 1,034,300 1,040,300 1,022,300
523,800
537,800
510,600
524,800
69,450
13,450
8,450
19,450
49,000
48,000
50,000
318,815
321,100
298,542
300,042
18,773
40,000
10,000
8,000
48,773
48,000
8,773
235,135
229,135
243,135
248,135
1,200
3,600
2,600
6,400
3,600
5,200
4,800
122,000
141,000
123,500
121,000
800
960
773
40,000
10,000
20,000
-

40. Based on the above and the result your audit, you will most likely issue
a. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
c. Qualified or adverse opinion
d. Unqualified opinion.
- End of AP-5908 -

AP-5908