Professional Documents
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AUDITING PROBLEM
2nd PRE-BOARD EXAMS
(SUN) 7:30 10:00am
INSTRUCTIONS: Select the correct answer for each of the following questions. Mark
only one answer for each item by shading the box corresponding to the letter of your
choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. USE
PENCIL No. 1 or No. 2 only.
PROBLEM 1 - You are a senior accountant on the staff of Alejo & Associates, CPAs. You are
conducting the annual audit of Harry Corporation for calendar year 2007. You are now
working on the audit of the accounts receivable and related allowance for doubtful
accounts.
ACCOUNTS RECEIVABLE TRADE
Reconciliation between General Ledger Balance and
The Total of Subsidiary Ledger Balances
December 31, 2007
Total of subsidiary ledger balances
Undelivered sales based on sales orders received up
to December 31, 2007 per journal voucher No. 1962
Goods consigned to Robinsons Appliance Center and others
Collections received from Cebu and Davao branches
on January 2 based on official receipts dated December
31, 2007 for sales made on December 16, 2007
Balance per general ledger
P 5,635,700
2,732,900*
3,260,700**
( 1,092,800)***
P10, 536,500
* Goods are physically segregated during inventory count. Sales invoices for these were
issued on January 2 and deliveries to customers were made on January 3, 2008.
**These goods were physically verified in customers stores.
Under the terms of
consignment, goods are billed to customers, based upon their sales report.
***Subsequently deposited on January 3, 2008.
Customers are billed at 20% above cost. Term 30 days.
ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES
Analysis of Movement during the Year
December 31, 2007
Allowance, December 31, 2006
Movement during the year
Provisions
Write-offs
Allowance, December 31, 2007
P1,020,000
3,425,625
( 4,164,370)
P 281,255
Per Client
P4,469,760
267,320
455,440
443,180
P5,635,700
Per Audit
P4,067,320
402,440
267,320
898,620
P5,635,700
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b. The lawyers informed us that debtors with account balances totaling P790,450
(classified as 91 days and over in the clients aging) were already found worthless.
They suggested that these accounts be written off next year.
c. It is the companies policy to provide monthly for accounts doubtful of collection,
based on aging schedule as follows: 2% for current, 5% for 31 to 60 days, 10% for
61 to 90 days and 30% for 91 days and over. Monthly write-offs are charged
against the allowance. At the end of the year a review of collectibility of each
account is undertaken by the credit and collection manager, the lawyers together
with a representative of its external auditor.
3. The balance of allowance for doubtful accounts should be adequate to cover possible
losses the company may incur in cases of non-collection: that is the account balance at
the end of the year should either be:
a. Total amount arrived at as doubtful by applying the percentage of possible
losses to the total of the account age classification or
b. Total amount arrived at as doubtful based upon the results of the review
of collectibility of each account: whichever is the higher of (1) and (2)
above.
Questions:
1. The gross amount of Trade Accounts Receivable to be reported in the audited balance
sheet at December 31, 2007 is
a. 1,019,500
b. 3,752,450
c. 10,536,500
d.
9,178,050
2. The Allowance for Doubtful Accounts to be reported in the audited balance sheet at
December 31, 2007 is
a. 138,795
b. 790,450
c. 568,000
d. 429,205
3. The Doubtful Accounts Expense to be reported in the audited income statement for
year 2007 is
a. 4,502,820
b. 3,993,625
c. 4,216,075
d.
3,564,420
4. The Allowance for Doubtful Accounts based on the aging of receivables is
a. 140,625
b. 138,795
c. 568,000
d. 139,798
PROBLEM 2 Masagana Corporation purchased P100,000 8% bonds for P92,418 on January
1, 2007. Masagana classified the bonds as available for sale. The bonds were purchased to
yield 10% interest. Interest is payable annually every January 1. The bonds mature on
January 1, 2012. On January 2, 2009, Masagana classified the bonds as held to maturity.
The prevailing interest rates of the bonds are as follows:
December
December
December
December
31,
31,
31,
31,
2006
2007
2008
2009
10%
11%
12%
11.5%
Questions:
5. Interest income for year 2008
a. 8,000
b. 9,366
c. 9,242
6. Market value of investment as of December 31, 2008.
a. 95,026
b. 90,393
c. 93,240
7. Unrealized gain or loss on AFS as of December 31, 2009.
a. (1,786)
b. (4,053)
c. 4,053
8. Unrealized gain on loss as of December 31, 2009.
a. (3,289)
b. (2,709)
c. 3,289
9. Carrying value of investment as of December 31, 2009.
a. 97,240
b. 96,429
c. 93,240
d. 9,818
d. 90,973
d. (4,633)
d. (2,519)
d. 110,000
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November 3 -
November 21
December 15 -
Page 4 of 7
9,900
Disbursements:
To trade creditors (after P8,000 cash discounts) P 70,000
To bank loans
12,000
To customers for returned goods
1,000
Questions:
15. Gross Sales for calendar year 2007
a. 113,000
b. 108,000
c. 120,000
16. Net Purchases for calendar year 2007
a. 68,000
b. 70,000
c. 76,000
17. Balance of Accounts Payable as of December 31, 2006
a. 12,000
b. 10,000
c. 16,000
18. Estimated ending inventory as of December 31, 2007
a. 31,000
b. 35,800
c. 27,350
19. Possible inventory shortage as of December 31, 2007
a. 2,350
b. 7,550
c. 10,800
d. 121,000
d. 82,000
d. 14,000
d. 32,550
d. 6,050
c. 60,000
d. 22,500
c. 6,400
d. 1,900
c. 112,500
d. 120,000
c. 172,500
d. 192,100
PROBLEM 6 You are engaged to audit the records of Western Company, which has not
previously been audited. The trial balance at December 31, 2007, follows:
Debits
Home Office
Branch
Cash
15,000
2,000
Accounts receivable
20,000
17,000
30,000
150,000
44,000
220,000
8,000
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93,000
Expenses
Total
Credits
Accounts payable
Mortgage payable
Capital stock
Retained earnings - January 1,
2007
Sales
70,000
41,000
549,000
161,00
0
23,000
50,000
100,000
26,000
350,000
150,00
0
Accrued expenses
2,000
9,000
Total
161,00
0
549,000
Date Deposited by
Branch
5,000
3,000
January 2, 2008
7,000
January 3, 2008
2,000
January 2, 2008
January 5, 2008
6. Expenses incurred locally by the branch are paid from an imprest bank account that is
reimbursed periodically by the home office. Just prior to the end of the year, the home
office forwarded a reimbursement check in the amount of P3,000, which was not
received by the branch office until January 2008.
7. It is not necessary to make provisions for income tax.
Questions:
24.The combined cash amounted to
a. 17,000
b. 30,000
c. 20,000
d.
25.The combined inventories will be
a. 36,400
b. 44,400
c. 48,000
d.
26.The corrected Home Office and Branch Accounts amounted to
a. 21,000
b. 19,000
c. 31,000
d.
27.Shipments in transit as of December 31, 2007 amounted to
a. 10,000
b. -0c. 25,000
d.
28.The combined sales will be
a. 500,000
b. 434,000
c. 395,000
d.
29.The combined cost of sales will be
27,000
38,400
34,000
20,000
350,000
210,400
b. 294,400
c. 313,000
adjusted Branch profit, before tax, amounted to
13,700
b. 20,600
c. 16,000
combined net income amounted to
51,600
b. 58,400
c. 76,000
combined operating expenses amounted to
111,000
b. 70,000
c. 123,000
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d. 219,800
d. 22,600
d. 61,600
d. 73,000
PROBLEM 7 - The general ledger accounts showed the following cash balances at December
31, 2007:
BDO current account
P210,000
EPCI savings account
90,000
Working Fund
10,000
Total per WBS
P310,000
BDO Current The following bank reconciliation as of December 31, 2007, was given to you
by the accountant:
Balance per books, December 31, 2007
Add: Deposit in transit
Debit memo for customers check returned unpaid
Less: Checks drawn but not paid by bank,
per schedule below
Error for an accounts payable entered on books
as P7,000 but drawn and paid by bank as P12,000
Computed balance
Unlocated difference
Balance per bank, December 31, 2007
P210,000
8,000
10,000
P18,000
5,000
(23,000)
202,000
6,000
208,000
AUDITING PROBLEMS
1
2
3
4
5
6
7
8
9
10
B
C
A
B
B
B
D
A
C
D
11
12
13
14
15
16
17
18
19
20
C
A
C
B
C
A
D
D
B
A
21
22
23
24
25
26
27
28
29
30
C
A
B
B
B
D
A
C
A
D
31
32
33
34
35
D
C
D
A
C
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