Auditing
Auditing
INTEGRATED ACCOUNTING
AUDITING PROBLEMS
QUIZ NO. 6
MULTIPLE CHOICE - On a separate sheet of paper, please choose the best answer (letter of your choice) among the
choices given under each of the following theory questions. Strictly no erasures on your answer sheet; otherwise
answers will be invalidated.
PROBLEM NO. 1
You have been assigned to audit the financial statements of AYALA MERCHANTS CORPORATION
for the year 2017. The company is a dealer of appliances and has several branches in Metro
Manila. Its main office is located in Makati City. You were given by the company controller the
unadjusted balances of the items to be included in the company’s statement of financial position
and statement of income as of and for the year ended December 31, 2017. Audit findings are as
follows:
I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2018. The petty cash fund of P60,000
maintained by the company on an imprest basis relected a balance of P22,750. Unreplenished
expenses totaled P37,250 of which P9,510 pertains to January 2018.
You were furnished a copy of the company’s bank reconciliation statement with Chartered Bank
as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000
1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These
represent collections from various customers whose accounts have been outstanding for less
than three months. These checks were actually deposited on January 8, 2018.
2. Included in the deposit in transit is a check from a customer for P63,000 which was returned
by the bank on December 27, 2017 for insufficiency of funds. This account has been
outstanding for over six months. The check was replaced by the customer on January 15,
2018.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes payable
including interest of P10,000 due on December 26, 2017. This was not recorded as of year-
end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.
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It is the company’s policy to provide allowance for doubtful accounts as follows:
The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary. This is
covered by a promissory note with interest at 15% per annum dated November 1, 2017. No
interest has been accrued on the note as of December 31, 2017.
V. AUDIT OF PREPAYMENTS
Prepaid expenses account consists of the following:
Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion as
well as the regular advertisement of its products. It paid a total of P640,000, P100,000 of
which is for the Christmas promotion while the balance is for the regular promotion and which
will run for one year starting on August 1, 2017. Payment was made on July 20, 2017, and the
total amount was reflected as prepaid advertising.
The company leases the main office and store in Makati City at a monthly rental of P140,000.
On November 5, 2017, a check for P420,000 was issued in payment of three-month rental as
per renewal contract which was effective on November 1, 2017. Rental deposit remained at
three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1, 2018.
No adjustment has been made as of December 31, 2017.
To take advantage of volume discount ranging from 10% to 20%, the company buys office and
store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on June 10,
2017 and included the same in their office supplies inventory. As at year-end, unused office
supplies amount to P102,500.
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VI. AUDIT OF INVENTORIES
A physical count of inventories was conducted simultaneously in all stores on December 29 and
20, 2017. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 have not been invoiced and recorded as of year-
end. These items had a selling price of P146,940 with term of 15 days. The corresponding
cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the inventory
list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January 4,
2018. The goods were shipped by the supplier on December 28, FOB shipping point.
The above equipment has an estimated useful life of ten years and estimated salvage value of
P20,000. Depreciation for the above equipment has been provided based on original cost.
The company discarded some store equipment on October 1, 2017, realizing no salvage value.
The cost of these equipment amounted to P165,520 with an accumulated depreciation of
P138,620 on December 31, 2017. Depreciation booked from October 1, 2017 to year-end was
P10,480. No entry was made on the disposal of the property.
Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
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Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880
Determine the adjusted balances of the following: (Ignore tax implications)
1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000
18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
SOLUTION:
PROBLEM 1 – AYALA MERCHANTS CORPORATION
Required
Per Books Adjustments Per Audit % Allowance
Less than 3 months P2,500,960 P146,940
107,400 P2,755,300 1 P27,553
3 to 6 months 843,200 843,200 5 42,160
Over 6 months 274,500 63,000
(152,460) 185,040 10 18,504
P3,618,660 P3,783,540 P88,217
2. D Cash in bank
Per books P1,056,000
AJE 2 (811,150)
Per audit P 244,850
3. D Trading securities
Per books P483,640
AJE 4 (10,940)
Per audit P472,700
4. C Accounts receivable
Per books P3,618,660
AJE 2 170,400
3 (152,460)
10 146,940
Per audit P3,783,540
7. A Inventories
Per books P7,274,900
AJE 11 (356,000)
12 (138,500)
13 153,800
Per audit P6,934,200
8. B Prepaid insurance
Per books P490,000
AJE 8 (81,667)
Per audit P408,333
9. A Prepaid rent
Per books P420,000
AJE 7 (280,000)
Per audit P140,000
18. C Sales
Per books P13,078,000
AJE 10 146,940
Per audit P13,224,940
JOSIAH Company
Statement of Financial Position
For the Year ended December 31, 2015
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Current Assets 540,000 Current Liabilities 730,000
Long-term Investments 176,000 Long-term Liabilities 380,000
Property Plant & Equipment 1,020,000 Contributed Capital 550,000
Intangible Assets 113,000 Unrealized Capital 108,000
Other Assets 131,000 Retained Earnings 212,000
Total Assets 1,980,000 Total Liab & Equities 1,980,000
Additional Information:
1.) Current assets include cash of P100,000, accounts receivable of P120,000, notes
receivable(Maturity date April 1, 2019) of P70,000 and land of P250,000.
2.) Long term investments include a P56,000 fair value through other comprehensive income
securities and a P120,000 investment in Long Company bonds that are expected to be held
until their December 31, 2021 maturity date
3.) Property Plant and Equipment include buildings costing P650,000, inventory costing
P70,000, and equipment costing P300,000
4.) Intangible assets include patents that cost P110,000 on which P20,000 amortization has
accumulated, and treasury shares that cost 23,000.
5.) Other assets include prepaid insurance (which expires on July 31, 2016), P24,000, sining
fund for bond retirement P70,000, and trademarks that cost P52,000 and on which P15,000
amortization has accumulated.
6.) Current liabilities include accounts payable of P250,000, bonds payable (maturity date
December 31, 2022) of P400,000 and accrued income taxes payable of P80,000.
7.) Long-term liabilities include accrued wages of P180,000 and mortgage payable (which is due
in five equal annual payments starting December 31, 2015) of P200,000.
8.) Contributed capital include ordinary shares (P5 par) P250,000 and preferred shares (P100
par) of P300,000.
9.) Unrealized capital includes premium on bonds payable of P40,000, premium on preference
shares of P25,000, premium on ordinary shares of P30,000 and unrealized increase in value
of fair value through other comprehensive income securities for P13,000.
10.) Retained earnings include unrestricted retained earnings of P105,000, allowance for
doubtful accounts of P12,000 and accumulated depreciation on buildings and equipment of
P65,000 and P30,000 respectively.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
21. How much is the total current assets as of December 31,2015?
a. 372,000 b. 314,000 c. 302,000 d. 290,000
22. How much is the total noncurrent assets as of December 31, 2015?
a. 1,643,000 b. 1,548,000 c. 1,850,000 d. 1,571,000
23. How much is the total current liabilities as of December 31, 2015?
a. 550,000 b. 950,000 c. 598,000 d. 370,000
24. How much is the total noncurrent liabilities as of December 31, 2015?
a. 780,000 b. 600,000 c. 560,000 d. 740,000
25. How much is the total shareholder’s equity as of December 31, 2015?
a. 700,000 b. 1,453,000 c. 807,000 d. 735,000
QUESTIONS:
Based on the above data, answer the following:
26. How much is the unadjusted net loss in 2015?
a. 73,200 b. 33,200 c. 253,200 d. 110,000
28. How much is the adjusted total assets as of December 31, 2015?
a. 1,176,750 b. 1,150,150 c. 1,108,750 d. 1,140,100
29. How much is the adjusted current liabilities as of December 31, 2015?
a. 418,000 b. 318,000 c. 436,000 d. 336,000
30. How much is the adjusted total shareholder’s equity as of December 31, 2015?
a. 222,100 b. 240,750 c. 214,150 d. 190,750
QUESTIONS:
Based on the above and the result of your audit, answer the following:
31. Adjusted sales for 2014
a. 387,500 b. 385,900 c. 385,800 d. 384, 200
32. Adjusted sales for 2015
a. 418,300 b. 422,600 c. 422,400 d. 419,100
Additional Information:
1.) In 2015, Jamie Allison Co., acquired trading securities for P800,000 and sold trading
securities costing P500,000 and P650,000 cash. ON December 31, 2015, the fair value of the
remaining securities increased to P450,000.
2.) On January 1, 2014, Jamie Allison Co., acquired P4,253,552 4-year bonds with a face value
of P4,000,000 and stated interest of 12% per year payable annually on December 31. The
bonds were acquired to yield 10%. The bonds are to be appropriate classified as financial
asset at amortized cost.
3.) On January 2, 2015, Jamie Allison Co. sold an equipment costing P480,000 with
accumulated depreciation of P200,000 for P500,000.
4.) On June 5, 2015, Jamie Allison Co. issued 10,000 P100 par ordinary shares for P120 per
share.
5.) On July 1, 2015, Jamie Allison Co. acquired equipment costing P1,000,000 for cash.
6.) On December 31, 2015, Jamie Allsion Co., acquired land by issuing bonds payable at face
value P1,000,000.
7.) Jamie Allison Co. declared and paid cash dividends for 2014 and 2015 as follows
Declared Paid Amount
2014 December 20, 2014 February 20, 2015 P 300,000
2015 December 20, 2015 February 20, 2016 P 400,000
8.) At the end of year, Jamie Allison Co. Treasury shares at a cost of P500,000.
9.) During 2015, Jamie Allison Co. recorded sales for the year amounted to P5,000,000 cost of
goods sold of P2,000,000 and income tax expense of P300,000 and net income of P700,000.
Also during the year, Jamie Allison Co. writes off an account amounting to P20,000 that was
found to be worthless.
QUESTIONS:
Based on the following data, answer the following:
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41. How much is the total cash collections from customers n 2015?
a. 4,330,000 b. 5,600,000 c. 4,350,000 d. 5,000,000
43. How much is the net cash provided by (or used in) operating activities?
a. 860, 109 b. 800,000 c.960, 109 d. 900,000
44. How much is the net cash provided by (or used in) investing activities?
a. (1,000,000) b. (500,000) c. 500,000 d. (1,060,109)
45. How much is the net cash provided by (or used in) financing activities?
a. 900,000 b. (800,000) c. 700,000 d. 400,000
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