University of San Jose- Recoletos College of Commerce Accountancy and Finance Department Auditing Problems I

COMPREHENSIVE PROBLEM in AUDITING PROBLEMS (5:00-6:00 p.m.)

Submitted by: JOHNRI I. VELEZ BSA-03 JESRIEL G. CRUIZ BSA-03

Submitted to: MR. CEDRIC VAL R. NARANJO, CPA, CAT Professor- Auditing Problems I

COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz

Submitted to: MR. CEDRIC VAL NARANJO,CPA

COMPREHENSIVE PROBLEM: HOPE, KINDNESS, HUMILITY & Co., one of the famous auditing firm in the country was engaged by VALUES Corporation, a small corporation in a town named PEACE, to audit its financial statement ended December 31, 2012. As the new auditor of the said firm, you and your fellow auditors were assigned to perform the audit of cash, receivables, inventories, and non-current operating assets.

CASH
The company maintains its bank accounts with PERSEVERANCE and STRENGTH Bank (PS Bank). Your review of your bank reconciliation statement disclosed the following information: 1. On December 22, 2012, the bank erroneously credited the account of VALUES Corporation for P195,000 representing deposit for the account of another company. 2. Postdated checks totaling P37,900 were included in the deposits in transit. These represent collections of accounts receivable from customers. The checks were actually deposited on January 5, 2013. 3. On December 28, 2012, the company issued checks to creditors totaling P115,000. These checks were released on January 5, 2013. 4. A check dated December 12, 2012, in payment of accounts payable was recorded as P12,000. Upon examination of the checks returned by the bank, the actual amount was P21,000. 5. A check for P4,750 in payment of a minor repair of office equipment was not recorded on the companys books. 6. Transfer of fund of P59,300 to PS Bank current account of DBS Securities was not recorded. This pertains to purchase of 5,000 shares of Metro Ferry to be held as trading securities. Based on quoted price as of December 31, 2012, the market value per share is P8.20. 7. Interest earned amounting to P5,720 was not recorded. 8. Deposits in transit and outstanding checks at December 31, 2012 amounted to P89,200 and P132,000 respectively. 9. The cash in bank balance per book on December 31, 2012 is P681,200. The petty cash fund of P35,000 was maintained on an imprest basis was counted on January 2, 2013. Unreplenished expenses include petty cash vouchers for various expenses totaling P19,300 and employees advances for P5,800 all dated December 2012.

COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz

Submitted to: MR. CEDRIC VAL NARANJO,CPA

RECEIVABLES
You also noted the following information from the unadjusted trial balance: Debit Credit Accounts receivable P1,452,700 Allowance for doubtful accounts P 10,200 Sales 4,820,000 Your review of the accounts receivable schedule disclosed that various collections totaling P17,350 were not recorded in the books but already reflected in the subsidiary ledgers. Because of your vigilance, you obtained more information: 1. A customers deposit of P38,000 for goods to be delivered in January 2013 was deducted from accounts receivable. 2. A cash advance to an officer of P75,000 was included as part of accounts receivable. 3. Goods sold on account and delivered on December 21, 2012 amounting to P31,810 were not recorded. 4. Collection of P15,275 on October 31, 2012 from FORTITUDE Trading was credited to the account of LOVE Mercantile. 5. A promissory note was issued by a customer to VALUES Corporation for goods purchased worth P168,000. The promissory note carries an interest of 12% per annum with a term of 60 days, value dated November 15, 2012. This was reflected as part of accounts receivable. No interest was accrued as of year-end. 6. Bad debts are provided based on 2% of outstanding accounts receivable at the end of the year.

INVENTORY
A physical count of merchandise on hand was made on December 30 and 31, 2012, which reflected a balance of P3,873,000. Your review of the inventory list disclosed the following: 1. Goods costing P148,000 shipped FOB shipping point on December 30, 2012 by a supplier to VALUES Corporation was received on January 3, 2013. The purchase was recorded on December 30, 2012. 2. Goods costing P195,000, shipped FOB destination by the supplier on December 28, 2012, were recorded and received on January 5, 2013. 3. Goods purchased in cash for P41,700 were returned to the supplier on December 22, 2012. These goods were still included in the inventory schedule and the refund was received and recorded on January 10, 2013. 4. Goods consigned to VALUES Corporation totaling P89,500 were included in the physical count. 5. Included in the physical count were goods sold to a customer on FOB shipping point on December 27, 2012. These goods with a selling price of P52,830 and a cost of P35,600 were already recorded as sales on account but were shipped only on January 5, 2013. COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz Submitted to: MR. CEDRIC VAL NARANJO,CPA

PROPERTY, PLANT, and EQUIPMENT

Account balances related to property, plant, and equipment include the following: Machinery (at cost) P273,000 Accumulated depreciation- machinery 144,600 Vehicles (at cost; purchased November 21,2010) 140,400 Accumulated depreciation- vehicles 58,968 Land (at cost; purchased October 25, 2008) 243,000 Building (at cost; purchased October 25, 2008) 557,160 Accumulated depreciation- building 85,842 Details of machines owned at December 31, 2012 are as follows: Machine Purchase Date Cost Useful Life Residual Value 1 Oct. 7, 2008 P129,000 5 years P7,500 2 Feb. 4, 2009 P144,000 6 years 9,000 Additional information: - VALUES Corporation calculates depreciation to the nearest month and uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum. - VALUES financial year-end is December 31. - The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P70,200. - On acquiring the land and building, VALUES estimated the buildings useful life and residual value at 20 years and P15,000, respectively. The following transactions occurred from January 1, 2012: 2012 Jan.3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326 and installation costs of P5,274 were paid in cash. The useful life and residual value were estimated at five years and P12,000, respectively. June 22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four new tires costing P1,035 were paid for in cash. Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of exchange. The fair value of machine 1 at the date of exchange was P34,500. The office furniture originally cost P108,000 and, to the date of exchange, had been depreciated by P72,300 in the previous owners books. VALUES Corporation estimated the office furnitures useful life and residual value @ eight years and P1,620 respectively. Dec. 31 Recorded depreciation. COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz Submitted to: MR. CEDRIC VAL NARANJO,CPA

2013 April 30 Paid for repairs and maintenance on the machinery amounting to P2, 784. May 25 Sold one of the vehicles bought on November 21, 2010, for P19,800 cash. June 26 Installed a fence around the property at cost of P16,500. The fence has an estimated useful life of 10 years and zero residual value. (Debit the cost to Land Improvements asset account.) Dec. 31 Recorded depreciation.

2014 Jan. 5 Overhauled machine 2 at cost of P36,800, after which VALUES Corporation estimated its remaining useful life at one additional year and revised its residual value to P15,000. June 20 Traded in the remaining vehicle bought on November 21, 2010 for a new vehicle. A trade-in allowance of P11,100 was received and P69,900 was paid in cash. Oct.4 Scrapped the vehicle bought on June 22, 2012, as it had been so badly damaged in a traffic accident that it was not worthwhile repairing it. Dec.31 Recorded depreciation.

Based on the foregoing facts, determine the following: 1. Cash balance per bank statement on December 31, 2012 2. Adjusted cash balance at December 31, 2012 3. The adjusted Petty cash fund balance at December 31, 2012 4. Carrying Value of Investment in Metro Ferry on December 31, 2012 5. Accounts receivable balance at December 31, 2012 6. Year-end adjustment to the Allowance for doubtful accounts 7. Adjusted Inventory on December 31, 2012 8. Sales that should be reported in 2012 Income Statement 9. Machine 3, purchased on January 3, 2012, should be recorded at 10.Second-hand vehicle purchased on June 22, 2012, should be recorded at 11.Office furniture acquired on August 28, 2012 should be recorded at 12.Gain to be recognized on the exchange of machine 1 for office furniture on August 28, 2012, should be 13.Total depreciation for 2012 14.Gain(loss) to be recognized on the sale of vehicle on May 25, 2013 is 15. Total depreciation for 2013

COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz

Submitted to: MR. CEDRIC VAL NARANJO,CPA

16. After the overhaul, machine 2s revised annual depreciation is 17. Cost of new vehicle acquired on June 30, 2014 18. Total depreciation expense for 2014

Happiness does not come from doing easy work but from the afterglow of satisfaction that comes after the achievement of a difficult task that demanded our best. - Theodore Isaac Rubin

COMPREHENSIVE PROBLEM J. I. Velez / J.G. Cruiz

Submitted to: MR. CEDRIC VAL NARANJO,CPA