Problem 1.
Audit of Cash and Cash Equivalents
The “CASH” account of Matthew Corporation’s ledger on December 31, 2020 showed the
following:
Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is P 15,000
dated Jan. 3, 2021)
Redemption fund account – PNB 500,000
Traveler’s check 100,000
Money order 10,000
Treasury bill, purchased Dec. 1, 2020 (due on Feb. 1, 2021) 50,000
Time deposit due on March 31, 2021 50,000
180-day treasury bill, due March 15, 2021 120,000
Note receivable in the possession of a collecting agency 20,000
PNB-checking account #211-009-091 325,900
Cash on hand, including customer post-dated check of P15,000 23,000
Savings deposit, earmarked for acquisition of equipment 210,000
A check payable to Mark Incorporated, dated Jan. 5, 2021, that was included in
the Dec. 31 PNB checking account #211-009-091 50,000
Overdraft in the PNB checking account #211-099-085 (material) (50,000)
Check #801 in payment of Accounts Payable, dated Dec. 31, 2020 not mailed 20,000
until Jan. 5, 2021
Advances to officers/employees for seminars (no liquidation is required) 80,000
Money market placement (due June 30, 2021) 600,000
Listed stock held as temporary investment 100,000
Check #789 in payment to suppliers, dated Jan. 5, 2021 and recorded Dec. 31, 35,000
2020
Customers’ certified checks 10,000
Pension fund 150,000
Total P 2,418,900
Based on the above and the result of your audit, determine the following:
1) Adjusted amount of cash
2) Adjusted amount of cash equivalents
3) Adjusted amount of cash and cash equivalents
4) The general cash account is considered a significant account in almost all audits:
a) Where the ending balance is material.
b) Even when the ending balance is immaterial.
c) Except for not-for-profit organizations.
d) Where either the beginning or ending balance is material.
Problem 2. Audit of Cash using Bank Reconciliation
You are conducting an audit of Luke Company for the year ended December 31, 2020. The
internal control procedures surrounding cash transactions were not adequate. The
bookkeeper-cashier handles cash receipts, maintains accounting records, and prepares the
monthly bank reconciliations.
The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement P 350,000
Add: Deposit in transit P 175,250
Note collected by bank 15,000 190,250
Total P 540,250
Less: Outstanding checks 246,750
Balance per general ledger P 293,500
In the process of your audit, you gathered the following:
a) On December 31, 2020, the bank statement and general ledger showed balances of
P350,000 and P293,500, respectively.
b) The cut-off bank statement showed a bank charge on January 2, 2021 for P30,000
representing correction of an erroneous bank credit.
c) Included in the list of outstanding checks were the following:
1) A check payable to a supplier, dated December 29, 2020, in the amount of
P14,750, released on January 5, 2021.
2) A check representing advance payment to a supplier in the amount of P37,210,
date of which is January 4, 2021, and released in December, 2020.
d) On December 31, 2020, the company received and recorded the customer's post-dated
check amounting to P50,000.
Based on the above and the result of your audit, answer the following:
1) Adjusted deposit in transit as at December 31, 2020
2) Adjusted outstanding checks as at December 31, 2020
3) Adjusted cash to be presented in the statement of financial position at Dec. 31, 2020
4) Cash short/over as of Dec. 31, 2020
5) Which of the following substantive audit procedures is least likely to be performed by the
auditor to gather evidence in support of the deposits in transit?
a) Inspect supporting documents for reconciling items not appearing on cut-off bank
statements.
b) Trace items on the bank reconciliation to cut-off bank statements.
c) Trace to cash receipts journal.
d) Inspect bank credit memo.
6) The starting point for the verification of the balance in the general bank account is to
obtain:
a) The client’s cash account from the general ledger.
b) A bank reconciliation from the client.
c) A cut-off bank statement directly from the bank.
d) The client’s year-end bank statement.
Problem 3. Audit of Accounts Receivable
In connection with your examination of the financial statements of John, Inc. for the year ended
Dec. 31, 2020, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.
● The December 31, 2020 balance in the Accounts Receivable control account is
P838,200.
● An aging of the accounts receivable as of December 31, 2020 is presented as follows:
Age Net debit balance % to be applied after corrections
60 days & under P 405,300 1%
61 to 90 days 287,600 3%
91 to 120 days 85,100 5%
Over 120 days 60,200 Definitely uncollectible, P7,000, the remainder
is 20% uncollectible
Total P 838,200
● The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
Jan. 1, 2018 P 18,250
Dec. 10, 2018 P 7,200 11,050
Dec. 31, 2018 (P838,200 x 5%) P 41,910 52,960
● Entries made in the Doubtful Accounts Expense account were:
a) A debit on December 31 for the amount of the credit to the Allow. for Doubtful
Accounts
b) A credit for P7,200 in December 12, 2020, and a debit to Allowance for Doubtful
Accounts because of bankruptcy. The related sales took place on Nov. 15, 2020.
● There is a credit balance in one accounts receivable (91-120 days) of P15,000; it
represents an advance on a sales contract.
Based on the above and the result of your audit, answer the following:
1) Adjusted balance of Accounts Receivable as of 12/31/20
2) Adjusted balance of Allowance for Doubtful Accounts as of 12/31/20
3) Doubtful accounts expense for the year
4) Net adjustment to Doubtful Accounts Expense
5) Accounts Receivable, net
Problem 4. Audit of Notes Receivable
Paul Company has the following transactions in 2020 involving notes receivable:
May 1 Received a P1,000,000, 90-day, 12% interest-bearing note from A
Company in settlement of account
May 1 Received a P1,500,000, six-month, 12% interest-bearing note from B Co. in
settlement of account
July 30 A Company defaulted on the P1,000,000 note
Aug. 1 Discounted the B Company note at a bank at 15%
Sept. 1 Received a 1-year non-interest bearing note from C Company in settlement
of a P600,000 account receivable. The face value of the note is P660,000
Sept. 28 Collected the defaulted A Company note plus accrued interest at 12% per
annum on the total amount due
Oct. 1 Received a P2,500,000, 90-day note from D Co. The note is for the
payment of goods purchased and bears interest at 12%
Nov. 1 B Company defaulted on the P1,500,000 note. Paul Co. paid the bank the
total amount due plus P60,000 for protest fee and other bank charges
Dec. 30 Collected D Company note in full
Dec. 31 Collected from B Co. in full including interest on the total amount due at
12% since default date
Based on the above and the result of your audit, answer the following:
1) Proceeds from the discounted B Co. note on August 1
2) Amount collected on September 28 on the defaulted A Company note
3) Amount collected on December 31 on the defaulted B Company note
4) Interest income to be recognized in 2020 related to these transactions
5) Customers with substantial due balances have failed to reply after second requests had
been mailed to them directly. Which of the following audit procedures is most appropriate
a) Examine shipping documents.
b) Review cash collections during the year being audited.
c) Intensify the study of internal controls for receivables.
d) Increase the balance in the accounts receivable allowance account.
Problem 5. Audit of Inventories
Your client, Peter Company, is an importer and wholesaler. Its merchandise is purchased from
several suppliers and is warehoused until sold to customers.
In conducting your audit for the year ended December 31, 2020, you were satisfied that the
system of internal control was good. Accordingly, you observed the physical inventory at an
interim date, November 30, 2020 instead of at year-end. You obtained the following information
from your client’s general ledger:
Inventory, 1/1/20 P 1,312,500
Physical inventory, 11/30/20 1,425,000
Sales for 11 months ended 11/30/20 2,600,000
Sales for the year ended 12/31/20 14,400,000
Purchases for 11 months ended 11/30/20 (before audit adjustments) 10,125,000
Purchases for the year ended 12/31/20 (before audit adjustments) 12,000,000
Your audit disclosed the following information:
Shipments received in November and included in the physical
inventory but recorded as December purchases P 112,500
Shipments received in unsalable condition and excluded from physical
inventory. Credit memos had not been received nor chargebacks to
vendor been recorded:
Total at 11/30/20 15,000
Total at 12/31/20 (including the unrecorded November chargebacks) 22,500
Deposit made with vendor and charged to purchases in Oct. 2020.
Product was shipped in Jan. 2021 30,000
Deposit made with vendor and charged to purchases in Nov. 2020.
Product was shipped FOB Destination on November 29, 2020 and
was included in November 30, 2020 physical inventory as goods in
transit. 82,500
Through the carelessness of the receiving department, shipment in
early Dec. 2020 was damaged by rain. This shipment was later sold in
the last week of December at cost. 150,000
Based on the above and the result of your audit, answer the following:
1) Gross profit rate for 11 months ended Nov. 30, 2020
2) Cost of goods sold during the month of December 2020 using the gross profit method
3) Dec. 31, 2020 inventory using the gross profit method
4) If attendance at physical inventory counting is impracticable, the auditor shall
a) Modify the opinion in the auditor’s report.
b) Make or observe some physical counts on an alternative date, and perform audit
procedures on intervening dates.
c) Perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory.
d) Do nothing and just rely on the result of physical inventory counting conducted by
the client.
5) Which statement is correct regarding physical inventory counting conducted other than
at the date of the financial statements?
a) For practical reasons, the physical inventory counting may be conducted at a
date, or dates, other than the date of the financial statements.
b) This may be done irrespective of whether management determines inventory
quantities by an annual physical inventory counting or maintains a perpetual
inventory system.
c) The effectiveness of the design, implementation and maintenance of controls
over changes in inventory determines whether the conduct of physical inventory
counting at a date, or dates, other than the date of the financial statements is
appropriate for audit purposes.
d) All of these.
Problem 6. Audit of Inventories
You are engaged in the regular annual examination of the accounts and records of Timothy
Manufacturing Co. for the year ended December 31, 2020. To reduce the workload at year end,
the company, upon your recommendation, took its annual physical inventory on November 30,
2020. You observed the taking of the inventory and made tests of the inventory count and the
inventory records.
The company’s inventory account, which includes raw materials and work-in-process is on the
perpetual basis. The inventories are valued at cost, first-in, first-out method. There is no finished
goods inventory.
The company’s physical inventory revealed that the book inventory of P1,695,960 was
understated by P84,000. To avoid delay in completing its monthly financial statements, the
company decided not to adjust the book inventory until year-end except for those obsolete
inventory items.
Your examination disclosed the following information regarding the November 30 inventory:
a) Pricing tests showed that the physical inventory was overstated by P61,600.
b) An understatement of the physical inventory by P4,200 due to errors in footings and
extensions.
c) Direct labor included in the inventory amounted to P280,000. Overhead was included at
the rate of 200% of direct labor. You have ascertained that the amount of direct labor
was correct and that the overhead rate was proper.
d) The physical inventory included obsolete materials with a total cost of P7,000. During
December, the obsolete materials were written off by a charge to the cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
a) Total debits to the following accounts during December were:
Cost of Sales P 1,920,800
Direct Labor 338,800
Purchases 691,600
b) The cost of sales of P1,920,800 included direct labor of P386,400.
Based on the above and the result of your audit, answer the following:
1) Adjusted amount of physical inventory at Nov. 30, 2020
2) Adjusted amount of inventory at Dec. 31, 2020
3) Cost of materials on hand, and materials included in WIP as of Dec. 31
4) An auditor is most likely to learn of slow-moving inventory through
a) Inquiry of sales personnel
b) Inquiry of warehouse personnel
c) Physical observation of inventory
d) Review of perpetual inventory records
5) Which of the following may provide sufficient appropriate audit evidence about the
existence and condition of inventory if attendance at physical inventory counting is
impracticable?
a) Inspection of documentation of the subsequent sale of specific inventory items
purchased prior to the physical inventory counting.
b) Inspection of documentation of the subsequent sale of specific inventory items
purchased after to the physical inventory counting.
c) Both a and b.
d) Neither a nor b
6) Purchase cut-off procedures should be designed to test whether all inventory
a) Owned by the company is in the possession of the company at year-end
b) Ordered before year-end was received
c) Purchased and received before year-end was paid for
d) Purchased and received before year-end was recorded
Audit of Investment
On April 1, 2017, Aja Corporation purchased a 5-year P1,000,000 10% bonds dated January 1,
2017. The bonds were purchased to yield 8%. Interest is payable annually every December 31.
Aja Corporation uses the “held for collection” business model for acquired and originated debt
instruments. The issuer paid the interest as scheduled in 2017 and 2018. During 2019, the
issuer of the bonds is in financial difficulties and it becomes probable that the issuer will be put
into administration by a receiver. On December 31, 2019, Aja Corp. estimated that none of the
interest will be collected and only P800,000 of the principal will be collected on maturity date. At
the end of 2020, the issuer is released from administration and Aja receives a letter from the
receiver stating that the issuer will pay P1,300,000 at maturity.
Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places)
1) How much was the total amount paid to acquire the investment in bonds on April 1,
2017?
2) How much is the amount to be recognized in 2017 profit or loss?
3) How much should be recognized as impairment loss in 2019?
4) How much is the interest income to be recognized in 2020?
5) The amount to be reported as debt investment on the entity’s December 31, 2020
statement of financial position is
On January 3, 2018, Naol Company purchased for P500,000 cash a 10% interest in Sakalam
Corporation. On that date, the net assets of Sakalam had a book value of P3,750,000. The
excess of cost over the underlying equity in net assets is attributable to undervalued depreciable
assets having a remaining life of 10 years from the date of Naol’s purchase. The investment in
Sakalam Corp. was designated as FVTOCI. The fair value of Naol’s investment in Sakalam
securities is as follows: December 31, 2018, P570,000; December 31, 2019, P525,000;
December 31, 2020, P2,200,000. On January 2, 2020, Naol purchased an additional 30% of
Sakalam’s stock for P1,575,000 cash when the book value of Sakalam’s net assets was
P4,150,000. The excess was attributable to depreciable assets having a remaining life of 8
years. During 2018, 2019, and 2020, the following occurred:
Sakalam Net Income Dividends paid by Sakalam to Naol
2018 P 350,000 P 15,000
2019 400,000 20,000
2020 550,000 70,000
Based on the above and the result of your audit, answer the following:
1) The net amount to be recognized in 2018 comprehensive income related to this
investment
2) The net amount to be recognized in 2019 comprehensive income related to this
investment
3) The adjustment to retained earnings as of January 1, 2020 as a result of the acquisition
of the additional 30% interest in Naol Corp.
4) The carrying amount of the investment in Sakalam Corp. as of December 31, 2020
